Problems of (Future) Financing the Local and Regional Economic Development

Abstract

We proved the main hypothesis of the paper that the methodology of banks’ capital measurement and banks’ capital structure is problematic. In the times of crisis causes many serious problems including financing of the future local, regional and global economic developments. We didn’t go here into quantitative correlation; however, qualitative outcome is very obvious. We proved this via the subordination problem. Basel II underestimated many risks that banks were disposed to in the bad times. Tier 2 (hybrids and subordinated debt) played too important role in the total banks’ capital. The private owners of Tier 2 and even some Tier 1 debt instruments were hit the most by the (banking) crisis; the official debt got more seniority. Current Euro-zone crisis has potential to cause additional markets’ volatilities and subordination crisis. Basel III will force banks to have more capital of the best quality. Existing and proposed capital accord system for banks with all details, pros and cons and detailed analysis with pointed out problems and implications on crisis and (future) regional and local economic development is the core of this paper. More Tier 1 will cause more stable conditions for banks financing local, regional and global (economic) developments.