Thursday, December 8, 2016

That banks allocate credit efficiently to the real economy is more important than avoiding bank failures

“THE MINNEAPOLIS PLAN reduces the risk of financial crises and bailouts to as low as 9 percent, at only a modest economic cost relative to the typical cost of a banking crisis. 

The Minneapolis Plan will (a) increase the minimum capital requirements for “covered banks” to 23.5 percent of risk- weighted assets, (b) force covered banks to be no longer systemically important—as judged by the U.S. Treasury Secretary—or face a systemic risk charge (SRC), bringing their total capital up to a maximum of 38 percent over time, (c) impose a tax on the borrowings of shadow banks with assets over $50 billion of 1.2 percent for entities not considered systemically important by the Treasury Secretary and 2.2 percent for shadow banks that are systemically important, and (d) create a much simpler and less burdensome supervisory and regulatory regime for community banks”

NO! Except for (d) “a simpler and less burdensome supervisory and regulatory regime for community banks” the Minneapolis plan suffers from the same fundamental mistake of current bank regulations. 

It fixates itself on avoiding bank failures, while entirely ignoring the much more important social purpose of the banks, that of allocating credit efficiently to the real economy.

To achieve that is impossible, while using risk weighting based on ex ante perceived risks to determine capital requirements. 

Would the Minneapolis Fed be able to provide me the answers to those questions the Basel Committee and the Financial Stability Board refuse to even acknowledge?

PS. And in any adjustment plan grandfathering existing capital requirements for the existing assets held by the banks would be required, so as to not risk contracting the credit market excessively.