FACE-OFFKEEP IT IN THE BANKTreasury officials want to increase the amount of capital that

FACE-OFF

KEEP IT IN THE BANK

Treasury officials want to increase the amount of capital that banks are required to hold in reserve. Sounds like a good idea, but will it squeeze lending and actually slow the economic recovery？ Here follow the perspectives of two experts:

RICHARD BOVE, (a famous bank analyst at Rochdale Securities): Yes. Capital reserves are higher than they've been since 1936. That wasn't the problem last year; it was that banks had to write down assets at distressed prices. The government is sending contradictory signals here, telling banks to increase lending and increase capital at the same time. You can't do both, so of course lending is going to tighten if you mandate higher capital reserves.

DOUG ELLIOTT, (a fellow at the Brooklings Institution): No. My research shows that if the minimum equity capital requirements were raised by 4 percent, the prices of a loan might go up only 0. 2 percent. That's negligible compared with the stability benefits of better-capitalized banks. The cost of capital is usually only a fifth of the total cost of a loan, and banks have several levers to pull besides loan price to deal with the need for more capital.

OUR VERDICT: The smart way to do this is to link the amount of capital banks have to hold in reserve to the amount of risk they take. The riskier they are, the more capital they need. Changes likely won't take place until 2011, so banks will have plenty time to prepare.

What is the main problem raised by the host in the commentary？

A．Whether Mr. Bove and Mr. Elliott's views are correct

B．Whether it is good to lift up the amount of capital reserves

C．The deep reason for Mr. Bove and Mr. Eliott to hold different opinions

D．How to accelerate the economic recovery