What Should Supervision Do?
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The supervision decides how much capital each bank needs. If new capital does not bring pro-rata new income, the return on the existing shares will decrease. Their value will fall. That is the reason why an increase in the capital never happens without compulsive regulation. A short trip through the accounting mirror presents a wonderland where the meaning of the word real is unreal, supervisors are white knights, and mighty accounting magic keeps zombie banks wandering around alive. The answer to the question: “What should supervision do?” is “Whatever it takes to make sure that the bank has required capital (and some more on top of it) and enough liquidity to timely meet all its obligations.”