Banks often oppose higher equity asset ratios, because equity capital is more expensive than debt capital. But this is precisely because of the lemon effect.

That, in turn, avoids triggering requirements of more bank capital.

But how much public capital should be used, and on what terms? Private capital, of course, is preferable, but, given the risk that it will be wiped out by future public intervention, investors will be wary.

The next challenge will be to push for a restoration of bank capital, so that commercial banks can once again lend for longer term investments.

Neither the Cypriot government nor European taxpayers will put any additional funds into these banks.

In the face of high systemic risk, private capital is leaving banks and the sovereign debt markets, causing governments borrowing costs to rise and bank capitalization to fall.

If faced with such losses, banks might choose to protect their reputations by using official funds for repayment, transferring the risk onto their balance sheets.

Exposure to Mexican debt alone represented some 90 of the capitalization of major US banks.

At a time when bank capital is scarce, that impediment carries significant economic costs.

But in bad times, when it is important to keep banks lending, bank capital would automatically be increased by the debt to equity conversion.

Bank capital is not cash reserves that must be set aside it is unborrowed money that can be used to make loans.

Within the eurozone, for example, banks can extend loans to any government using exclusively borrowed money.

As they struggle to raise new capital, European banks and insurers are likely to be forced to sell overseas assets.

As a result, the banks have been focused on returning the bailout funds at the earliest opportunity, rather than using them to boost lending.

Banks must pay for their implicit government guarantee by using less leverage and accepting restrictions on how they invest depositors money.

The ECB s policy was not inflationary, because the aggregate stock of central bank money in the eurozone was unaffected.

Indeed, if, as some believe, only a fraction of the banks equity is at risk, the potential debt equity swaps would be minuscule.

But doesn t the banks ability to raise new equity capital indicate that, regardless of whether the stress tests are reliable, investors believe that their assets value does significantly exceed their liabilities?

Much has already been done to advance regulatory reform, notably the recent agreement to strengthen bank capital (Basel III).

There is more to come. As they struggle to raise new capital, European banks and insurers are likely to be forced to sell overseas assets.

Clearly, some of the EFSF funds will have to go to recapitalize banks that cannot raise money from the markets.

The government has established a new agency, Central Hujin Investment Company, to manage and re capitalize big state owned banks before they are sold.

The Federal Reserve s bailout of the financial system is unlikely to stand up unless banks find fresh capital, and lots of it. Ultra rich sovereign wealth funds have the cash to rescue US banks.

And the Fed can congratulate itself on the mostly unobserved way that the large banks have used taxpayers money.

To use the partner countries taxpayers money to rescue Spanish banks is neither economically justified nor politically acceptable.

A better way to help banks and prevent them from simply deleveraging their business would be to establish full transparency and provide fresh money from taxpayers.

Indeed, Turkey did not have to spend a penny of taxpayers money on bank recapitalization or rehabilitation during the global financial crisis.

Government subsidies for private bad banks, or public bad banks to clean up private banks toxic assets, are a bad way for taxpayers to transfer money to troubled banks compared to normal capital injections.

Anat Admati, a professor at Stanford s Graduate School of Business, focuses on bank capital specifically, the incentives that banks have to fund their activities with very high leverage little equity and a great deal of debt.

And bank bailouts, involving the direct use of public money to recapitalize failing institutions, are even more costly and politically unpopular.

As guardians of the nation s money supply and setters of short term interest rates, central bankers have always played a critical role.

But the former is usually implicit and uncertain, making it vulnerable to default. If faced with such losses, banks might choose to protect their reputations by using official funds for repayment, transferring the risk onto their balance sheets.

Thus, large banks are likely to continue to hold too little capital and to take excessive risks, raising the prospect of renewed bouts of financial instability.

In particular, the Target2 credit drawn by the crisis afflicted countries central banks, which already totals almost 1 trillion, should also be taken into consideration.

Green Money

Alms given on religious grounds.

Gifts

The government s money is as good as anybody else s.

The old NPL problem was resolved, primarily by establishing asset management companies to take over doubtful assets, and injecting new capital into the commercial banks.

First, while broad financial stability has been restored, and bank capital has been boosted significantly as a result of last year's stress tests, there are still important pockets of weakness.

If the International Monetary Fund were calling the shots in Europe, they would be arguing forcefully for tough stress tests and bank recapitalization throughout the eurozone.

The Fed s commitment to buy shares of the mutual fund at a preset price would have caused investors to put new capital into the stronger banks to take advantage of the central bank s price support.

Dirty Development Money

The Hot Money Trap

The Federation of Bosnia and Herzegovina budget funds (3 per cent of needs) Cantonal budget funds Municipal budget funds Other funds as decided by the Government of the Federation or cantonal governments or extended by municipal and administrative decisions.