Does it make individual banks safer? That’s the question Douglas Holtz-Eakin asks in this op-ed at RealClearPolicy. I can’t say I know the answer and I seriously doubt there’s any abstract answer to it. It’s an empirical question and, apparently, we’re conducting the experiment right now.
I’m guessing that it won’t but not for the reasons he lists. I’m guessing that regulatory capture will ensure that exceptions will always be made.
In the third paragraph, it goes off the rails. The bank lends $100 million, and then, it raises $3 million in capital. The $100 million is borrowed into existence. The costs are the overhead to manage the loan(s) and any dividends paid to the shareholders.
The purpose of the increased capital requirement is to put more of the shareholders money on the line.
I think Minsky conclusively argued there is nothing to be done to make banks truly safe, short of a public banking system. Rules leading to financial stability will be inevitably be relaxed.
Higher capital requirements would restrain the ability to make loans by making them more expensive, but after a time certain people will begin saying things like “we’ve tamed the business cycle” and those rules would be revoked as relics of the past interfering with market efficiency.
Higher capital requirements are a tax? I guess that is a good way to rally conservatives against higher capital requirements. I would agree that there is no way to make banks perfectly safe, but we can make the odds a bit better. (Make them all partnerships so the bankers can actually have their personal assets taken away and you make them even safer.)
Steve
“Make them all partnerships so the bankers can actually have their personal assets taken away and you make them even safer.”
Not necessarily. That’s called a private equity fund, and they are not safer, they just demand a greater return. Do that to a bank and you have bricks and mortar sitting idly.