Granted, it was a letter the the editor, not an editorial or op-ed piece, but they published it, which means they think it has value. The subject was bank reserves, a traditional sticking point between regulators and bankers. Reserves are cash, or liquid assets owned by the bank, which they can use to keep going when their loans default. Regulators always want the bank to have more reserves, bankers always want less. If a bank cannot pay out cash to depositors making a withdrawal, the bank is in serious trouble. Word gets around, at the speed of light, and all the depositors hot foot it down to the bank to withdraw their funds while they still can. This is a run on the bank, every one wants all their money, right now, and no bank can do that, they don't have reserves that big, and all the money the depositors entrusted to the bank have been loaned out. Poof, one vaporized bank, FDIC has to pay off the depositors.
The WSJ letter write proposed that banks purchase "put options" on their own stock. A put option is short selling, a bet that the stock price will fall before the short seller has to deliver the stock. Anyhow, the writer feels that this dodge would create "regulatory capital" ( what ever that might be). This is pur magical thinking. When loans go bad, a bank needs cash, or really liquid investments, like US T-bills which can be turned into cash on short notice, to pay off depositors. Banks cannot give "regulatory capital" to a depositor at the teller's window, they need cash.
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