Due to the recession, banks are being forced to “raise their capital cushion against risky assets”(WSJ). These tighter requirements are lowering the exposure and risk the U.S. banks have on the market. However, this is also diminishes the returns that risky investments give. The implementation of such policy has clearly two sides to it.
On the pros:
• Banks will probably tone down their risk-taking and shift to more staid strategies
• This may lead to less risk for the financial system overall.
On the cons:
• This will decrease short term profits
• Stock trading has decreased as investors have become more insecure about the market and skeptical about government regulation.
• “banks are losing traders and business to nonbanks such as private-equity firms or hedge funds.” (WSJ)
The bottom line being that sacrifices must be made in the short run in order to have a more stable market on the future. Huw van Steenis, a bank analyst at Morgan Stanley in London, said it best when he stated that “the obligation to hold more capital means that return on equity will go down"(WSJ). This is a fact, and the market is already responding and adapting this new trends. We can expect a decrease on the returns commercial banks give to their costumers on their investment portfolios but increase on the confidence on the market in months to come.
Refrences:
http://online.wsj.com/article/SB10001424052748703466104575530273745563564.html
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