RE: [OPE] Credit

That is true enough, but what I am saying is that the risk of crisis does not depend on the equity ratio of the banks but the reserve ratio, since it is the reserve ratio that cushions them against random walks in the pattern of deposits and withdrawals.
If a bank, like Northern Rock a couple of years ago, becomes dependent on a small number of large depositors ( interbank deposits ) then the amplitude of such random walks will be much greater ( inverse to the square root of the number of depositors ). Under these circumstances random fluctuations can exceed reserves.
Equity ratios are important for a different reason -- cushion against bad debts.
________________________________________
From: ope-bounces@lists.csuchico.edu [ope-bounces@lists.csuchico.edu] On Behalf Of Gerald Levy [jerry_levy@verizon.net]
Sent: Wednesday, February 10, 2010 11:04 PM
To: Outline on Political Economy mailing list
Subject: Re: [OPE] Credit

> Do people agree that the reserve ratio rather than the equity ratio is
> what should be important?

Hi Paul C:

This really boils down to the issue of what abilities the central bank has
in practice to control
the supply of credit. The reserve ratio as such is only a single
'instrument' of monetary policy
which, in turns, relates to the commitment of the state to regulate the
supply of money and the
availabilility of credit. If the state wants, they can inflate, deflate,
bail out banks and corporations,
guarantee credit, etc. but, ultimately, different classes and/or class
segments have to pay for
these initiatives. The state itself, after all, has assets - an important
focus of struggle e.g. re
privatization. So, in answer to your question, I'm not sure - but I think
the question itself
would be better re-phrased and the issues themselves have to be spelled out
more, imo.

In solidarity, Jerry

> to my mind the key ratio is not equity to assets, but deposits with the
> central bank + notes + coin versus total liabilities.

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Received on Thu Feb 11 15:40:47 2010