Saturday, October 3, 2015

Past Banking Runs, Crises And Failures Were Not Stopped By Stricter Mortgage Lending And Higher Bank Equity

My comment posted to The Wall Street Journal, Opinion Commentary, "How Not to Prevent the Next Financial Meltdown: Dodd-Frank’s safeguards against chaos are based on a misdiagnosis of what led to the 2008 crisis." by Edward P Lazear:
100 years ago national banks and some state banks were prevented from making mortgage loans. Banks that could make mortgages required a buyer to put 50 percent down and to payoff the mortgage in 3-5 years. Bank crises occurred anyway.

The older, more stringent lending requirements did not stop bank runs, bank failures, or, in the 1930s, mortgage defaults and foreclosures. Tough mortgage lending decreases the availability of mortgages and limits home purchases.

Increasing the number of loans requires increasing available bank funding through equity or debt.

Many publicly traded banks regularly trade below book value, which means a bank cannot earn enough in its business to attract and compensate equity owners for the risk, and limits its ability to issue equity. To increase the equity ratio, banks usually shrink loan assets. More debt is easier.

Without FDIC, TBTF [Too Big To Fail], GSEs [GNMA, FNMA, etc.], or securitization, many in the middle class would not get mortgages because banks could not get funding for home loans.

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