Charles Calomiris on Capital Requirements, Leverage, and Financial Regulation

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4.7 • 4.3K Ratings

🗓️ 5 March 2012

⏱️ 87 minutes

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Summary

Charles Calomiris of Columbia University talks with EconTalk host Russ Roberts about corporate debt, capital requirements, and financial regulation. This is an in-depth conversation about how debt works on a firm's balance sheet and the risks that debt vs. equity pose for the survival of the firm. Calomiris applies these insights to financial regulation--how it works in practice and the firm's choices in responding to various interventions including bailouts and capital requirements. The conversation closes with a discussion of some of the government interventions in the financial crisis.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host Russ Roberts
0:13.9	of George Mason University and Stanford University's Hoover Institution. Our website is econtalk.org
0:21.2	where you can subscribe, find other episodes, comment on this podcast, and find links to
0:26.5	another information related to today's conversation. Our email address is mail at econtalk.org. We'd
0:33.6	love to hear from you.
0:39.7	Today's February 15th, 2012, and my guest is Charles Calamaris, the Henry Coffman Professor
0:46.0	of Financial Institutions at Columbia University's Graduate School of Business. Charles, welcome
0:50.8	back to Econ Talk.
0:52.0	Great to be with you, Russ.
0:53.7	Our topic today is financial regulation and how greater stability of the financial system might
0:58.2	be achieved. You have been critical of the current system. The current system, of course,
1:03.0	includes the recent past and the present and how that might be improved. You've made some
1:08.8	suggestions, but I want to start with some very basic ideas that we've touched on in many other
1:13.2	podcasts, but we're going to try to go deeply into the foundations to bring people up to speed,
1:17.9	including myself. First, when we talk about a bank having a particular amount of capital,
1:25.5	or we talk about capital requirements, which is going to be related to what is called leverage,
1:31.0	the ratio of debt to equity or debt to capital, what are we talking about? What does that actually
1:38.0	mean in practice?
1:39.4	Well, the word, pardon me, the word capital, as it pertains to banking, is from a regulatory
1:47.9	standpoint, is referring to regulatory capital requirements. Regulatory capital is not just
1:56.8	the equity value of the bank on a book value basis. It also includes other capital items.
2:05.3	Now, this is a little bit tricky to explain to people who aren't familiar with finance and
	...

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