Kicking the Can: The Issue of Bank Capital
The inevitable Greek default is going to have a worldwide impact even if done in an orderly, thoughtful, and coordinated way. (If not planned properly, expect very high volatility in the financial markets.) And financial institutions in the U.S. will not be spared the effects of such a default. If the European banks appear in danger, U.S. money market funds, and very likely some of the SIFIs with loans to European banks, will be hard hit by market action. We have already seen the beginnings of this.
More Capital -- the Reason for Basel IIIIt should be obvious by now that many of the largest worldwide banks need more capital. Yes, even those in America. (Consider the recent Bank of America denial of its need only to obtain capital within a week of the denial!) The need for capital is why we have Basel III. Unfortunately, the Basel III timeline is too lengthy, as the capital is needed now. Without new capital, much of the developed world will suffer the fate that Japan has suffered over the past two decades and now present in the U.S., with banks too worried about capital levels to want to take on additional risk in the form of business loans. Well-capitalized banks at least remove the constraint of loan availability when conditions are right for economic growth.
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