Bank capital and German Google searches

Two thoughts today.

1. Are the banks really safer

People are saying the post-financial crisis regulations have done their job and the banking sector is much safer now. In some ways yes, banks now have better liquidity positions (and the Fed acts more quickly when companies need cash), stress tests, resolution plans, more active risk management departments, and a slew of other new regulations. But the most important metric, bank equity levels, are not so much higher.

The Federal Reserve Bank of Minneapolis' Plan to End Too Big to Fail calculated that to keep the probability of a bank crisis in the next century below 10 percent, banks would need capital amounting to 38 percent of assets. Here is how bank capital has progressed against that since 2007:

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A follow up post might place this in the context of things such as buybacks, a summary of the new bank regulations (including new ways to calculate loss reserves), Basel risk-weighted assets, and the shadow banking sector, as well as popular books on the topic such as The Bankers' New Clothes by Anat Admati and Martin Hellwig and The End of Alchemy by Mervyn King.

2. What will happen to the euro when tourists avoid Greece this summer 

In Crashed Adam Tooze writes that one of the two problems about the eurozone that preoccupied experts was the risk of asymmetric external shocks. He cites a 1992 paper by Tamim Bayoumi and Barry Eichengreen who write that

"there remain serious questions about the advisability of the EMU ... In response to country-specific shocks, governments will no longer have the option of adopting a monetary policy which differs from that of the union as a whole. Insofar as monetary policy is useful for facilitating adjustment to disturbances, adjustment problems may grow more persistent and difficult to resolve."

The chart below shows Google searches in Germany for "flights to Greece" and Greece's TARGET2 balance (a measure that tracks current accounts and bank flows between eurozone countries). TARGET2 imbalances are driven by current account financing, capital flight, or deposit flight. 

I'm using searches for "flights to Greece" as a leading indicator for Greece's tourism industry. It was surprisingly high in March 2020, but has begun to drop in April. Could be worth tracking to see whether the pandemic becomes the type of asymmetric shock that puts a lot of additional strain on EU periphery finances and the euro from an unexpected direction.

Note: the most important factor reducing capital flight from Greece was Draghi's whatever it takes speech in July 2012 (also, I think, the ECB's QE bond-buying program launched in March 2015). This is reflected in the sharp increase in Greece's TARGET2 balance from late 2012 to mid 2014 (and the later increase from mid 2015 to 2019).