Thread by @LynAldenContact

Regulators have historically had a tough time predicting systemic bank risk ahead of time.

Bank capital ratios, for example, were not predictive of the 1929 or 2008 financial crises. Risk-weighted and raw charts:

Capital ratios are of course critical for analyzing the health of a specific bank balance sheet, but historically failed to detect system issues in the bank lending sector.

That's why they were reformed post-GFC, to make them more granular.

Historically some combination of private debt as a % of GDP, monetary base as a % of total bank loans, and the percentage of bank assets held in nominally risk-free assets, has been more predictive.

For example, the monetary base as a percentage of bank loans was historically low leading into the 1929 and 2008 deflationary debt crises.

However, it also helps to check bank Treasury levels, which were also low in both periods.

These charts for example shows the % of US bank assets held in cash and Treasuries/Agencies leading into 2008.

Reserve requirements are there to prevent bank runs. Capital requirements are there to reduce the risk of bank insolvency.

However when looking at macro data sets, low bank reserves and Treasuries combined as a % of assets tend to occur prior to banking failures.

Private debt as a % of GDP and M2 were key aspects as well.

Unsurprisingly, high private leverage in an economy AND banks having low total allocations to risk-free assets, are a dangerous combination.

Basically, the 2020s banking system continues to look like the 1940s, meaning banks are stuffed full of cash and Treasuries, and rapid money supply growth is coming from fiscal deficit spending, not bank lending.
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