September 11 was a stern test for all capital markets but
none of them was more eagerly watched by financial regulators than
the market in tier-one bank capital. This paper is a bellwether of
investors' perception of the solvency of banks. It is also a young
market, barely two years old in its present regulated form, and so
prone to sharp fluctuation.
"This was the first test of the market," says David Marks, head of
the financial institutions group at JPMorgan. Bank capital passed
its first examination, say market observers, but not with
distinction. According to Marks: "The investment banking community
did not distinguish itself particularly well in providing liquidity
in these instruments. September 11 put the cattle prod into the
middle of the nervous system of many investors."
While some market makers melted away, for fear of getting loaded
with subordinated bank paper in an illiquid market,...
