19 Aug 2009

Banks need to be protected from themselves

The farcial comedy surrounding the attempted takeover of Continental by Schaeffler proves that the old saying is correct: the more you owe the banks the more you can dictate to them. The banks should never have agreed to advance billions of Euros to support Schaeffler's attempt to gain control of Continental AG in the first place. Even in times or normal credit markets the leverage ratio was just too high and made no allowance for a deterioration of the economy and/or markets. Lending cannot just be done on the basis of assuming the best of all worlds. As the upside is limited in any credit exposure (to par value) lenders have to build in worst-case scenarios and err on the pessimistic side. Regulators must assure that banks are conservative in their lending practices and should limit loans to prudent ratios in relation to the equity capital available to creditors.

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