Tuesday, January 31, 2012

A short, scary hypothesis about credit availability

This is an incomplete thought, but one I wanted to put down.

Regional bank stocks are not very expensive right now. Entire loan books can be taken out for not much money.


Does this mean that a rational bank that has capital should be looking to take out FDIC-mediated undervalued pieces of loan books from failed banks rather than creating new loans – because functionally, new loans cost market value, and the FDIC will give them new loans for less than that?


Does that mean that only banks with the worst credit analysts create loans? Because banks on the brink of failing can try and "grow their loan book" out of the problem, but the FDIC won't work with them, and they're the ones with lousy credit analysis which is why they got into trouble in the first place? And the ones with capital cuz they're good at credit analysis don't initiate loans?


That seems like a dangerous problem. The FDIC lottery/auction system does create some weird incentive effects.

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