Stephen Kanitz

Credit Card Crunch

Dont forget that US and Basel I and II rules, prohibit banks from lending more than 12 times their capital and retained earnings. Factor in 4% inflation and that means every year banks have to recall 4% of their capital base x 12 in real terms , which depending whose number you use on capital base, ammount to 2 trillion, quite near to your number. The mistake is creating a rule which does not allow banks to lend their inflation adjusted capital and retained earnings. When banks make profits in good years, this capital errosion is partly compensated. In 2009 and probably 2010 that will not be the case. Big trouble ahead.