Geithner's Claim that Most Banks are Well Capitalized is Meaningless

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Ben Cohen
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By Ben Cohen

Paul Krugman is baffled by Geithner's recent assessment that the 'vast majority' of banks are well capitalized. The problem is, the small minority of banks that aren't well capitalized are so enormous, the statement is completely meaningless. Writes Krugman:

There are 1,722 institutions on the

Fed’s list of “large commercial banks”

.


And I have no doubt that most of these banks — indeed, the vast


majority — are in fine shape. That’s because they’re regional


institutions that never got into the risky games played by the big


guys.


But the big guys are where the money is. The top 10 institutions on


that list have 58 percent of the assets. (If we looked at bank holding


companies rather than only commercial banks, assets would be even more


concentrated.) So it’s perfectly possible that the “vast majority” of


US banks are well-capitalized, but that banks with, say, a third of the system’s assets are insolvent.

The stress test results still haven't been released (we have to wait till Friday), and I'm sure a lot of politics will be played to prep the public (the news will no doubt be bad), so it looks like Geithner may be trying to bolster confidence before the bomb drops.