The Hard Data Shows that Sheila Bair is Correct

The New York Times article, Regulators Feud as Banking System Overhauled, presented an interesting insight into the regulatory world. In essence the opposing points of view are,

(1) John C. Dugan, the Comptroller of the Currency, blasted a proposal to impose stiff new insurance fees on banks as unfair to the largest banks, which he regulates.
(2) Sheila Bair, chair of the Federal Deposit Insurance Corporation, says that the large banks had wreaked havoc on the system, only to be bailed out by “hundreds of billions, if not trillions, in government assistance.” Sheila Bair regulates the smaller banks.

In my blog post, We Need a Non-Linear Risk Capital Scheme, I showed that the Obama Administration had indeed allocated TARP funds fairly uniformly at 2.69c of TARP per $1 of bank assets across the industry. However, the banking industry like many industries is relatively opaque. What the TARP allocation allowed us to infer was that professional bankers tend to underestimate their risk as these risk increase.

These inferences taken with my earlier blog post, TARP, a Post Event Risk Capital, shows that the 20 biggest TARP recipients received more TARP than the 20 smaller TARP recipients when normalized for risk capital or equity. The biggest recipients received on average $15.9 billion TARP each, or 54%.77 of their equity, while the smaller recipients recieved on average $0.12 billion or 24.94% of equity.

The hard data shows that Sheila Bair is correct, that big banks were undercapitalized for the risk they were taking compared to the smaller banks. This does not mean that the smaller banks were risk averse, just that the bigger banks were more risk seeking than the smaller banks. And this makes logical sense because the bigger banks could better afford to pay for resources to delve in and exploit exotic (with hindsight) high risk instruments.

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Disclosure: I’m a capitalist too, and my musings & opinions on this blog are for informational/educational purposes and part of my efforts to learn from the mistakes of other people. Hope you do, too. These musings are not to be taken as financial advise, and are based on data that is assumed to be correct. Therefore, my opinions are subject to change without notice. This blog is not intended to either negate or advocate any persons, entity, product, services or political position.
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