Professor Edward Kane:

Equity capital is ownership capital and it is capital that can absorb losses immediately without any manipulations. Without raising additional money, it is there. It is the owner stake. The taxpayers have been made owners by the norms of the financial safety net management.

The Chairman's other question was about capital requirements. Equity capital is de factothe amount of resources that owners have supplied, including or not including taxpayers, depending on how one wants to break it down. Capital requirements are looking to stockholder capital. This is capital that has been put up by stockholders. These are measured by accounting principles and rules. There are three sets of accounting rules that allow troubled banks to hide the losses that should go through to their capital. One has to do with itemisation rules. They might not itemise, for instance, loans that are going sour and that everyone in the bank knows are worth, say, 50 cent, 25 cent or 10 cent in the dollar. They keep them at par by accounting manipulation. As far as capital requirements are concerned, it looks fine, even though, from an economic point of view, it is a lot of losses. Another has to do with when one realises losses - which is very closely related to this - or realises gains. A troubled bank tends to bring its gains - its good results - forward and to push the recognition of the losses into the future. Finally, the values they assign will also be biased, if they are troubled banks, to try to overstate the values of things, that is to use touchstones that overstate it. The problem is that by the time the violation in what you want capital requirements to capture is identified and a firm is recognised by accountants as insolvent, it has been deeply insolvent for a long time. The incentives to take these end-game gambles, to go for broke, just loads more losses, on average, on the taxpayer, even though some of these firms win their bets.