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After The Volcker Rule
The Real Banking Regulation Fight

After the Volcker Rule was passed in December, there was much misplaced rejoicing. The real issues behind the successful regulation of banks are only now being debated.

Published on: January 14, 2014
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  • free_agent

    I remember reading somewhere that Goldman Sachs, considered the cleverest of the big banks, is thought to have been net-short on the US housing market by the time the bubble popped. And it still nearly went broke in the ensuing funding crisis.

  • Anthony

    Banks and banking are integral to modern capitalism; credit markets, capital ratios, market making, CDSs, etc. remain foreign to average societal student, aspiring home owner, worker, pensioner, etc. Accordingly, financial reform (banking) must be viewed in realistic context – are banks institutions set up to promote societal interests or are banks corporate manifestations of capitalism that via mixed economy need regulation given financial and technical changes over last decade. As essay implies Basel III is a beginning but policy makers (“The Federal Reserve delayed implementation of leverage limits on largest American financial institutions…”) need financial cogency first and foremost to initiate impact author infers.

  • TommyTwo

    “Let’s make reform boring, but impactful.”

    Oh no! qet’s head has just impacted his desk! 🙂

  • Doug

    As Admati and Hellwig point out in The Bankers’ New Clothes, plenty of big banking crises have been brought on by plain old fashioned lending. That’s what happened in the Savings and Loan Crisis of the 1980s. The simple truth is that loaning money is a risky business. There is no such thing as a “safe” bank that takes deposits and makes loans versus a “risky” bank that does that and also trades and makes markets. Those are all risky activities. The key is to require equity capital, a lot more equity capital. Hellwig says that back in the 19th century, before the rise of central bankers as lenders of last resort, banks commonly had capital/total asset ratios of around 30%. Fast forward to today, and Basel III requires 3%. Even though the bankers are crying that 3% is too high, in fact it leaves almost no margin, almost no cushion for losses when (not if) the next financial crisis hits.

    • Fat_Man

      Amen to that, The 3% is less than it appears to be because of the “risk weighting” of assets. That is the conceit that certain investments such as mortgages and government issued bonds (even by Greece) carry no risk of default. Hah, hah.

      My own proposal would be to raise the capital requirement for all banks to 12.5% of all assets, except cash, and to increase the capital requirement for big banks by adding (ln[total assets ex cash] -19)% to the 12.5% base, and by requiring all the big banks subject to increased capital requirement to issue publicly traded subordinated debt in a like amount. For the biggest banks this would move their capital ratios to near 40%, where they ought to be.

  • Anthony

    “Secular stagnation refers to the idea that the normal, self restorative properties of the economy might not be sufficient to allow sustained full employment along with financial stability without extraordinary expansionary policies.” (Larry Summers, former Treasury Secretary) Additional commentary on financial regulatory approaches related to essay’s general theme can be found at Washington Post.

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