Thomas Hoenig of the FDIC, please indicate your colleagues, the right non-Taliban way of regulating banks.

In a speech of November 5, Thomas Hoenig, the Vice Chairman of the FDIC in a speech titled "Post-Crisis Risks and Bank Equity Capital", spelled out correctly and clearly the problem with current bank regulations.

Hoenig stated: “Global banks are not as well capitalized as some within the industry would have you believe. The fact is they remain highly leveraged and highly complicated, and should one fail, it would have systemic, destabilizing consequences. There are two different ways to address these concerns. One would require detailed rules to control firms' behaviors, structure their balance sheets, and direct their activities…

The other way to promote stability would be to simply demand more equity capital to enable banking firms to better withstand a crisis, while allowing them to run their businesses with less government direction.

The first option would require regulators to predict what activities and investments might cause future crises. It also would require them to calibrate rules in a manner that wouldn't give rise to subsequent crises. In other words, regulators would have to successfully anticipate the source of future crises, which as you know could arise from a number of activities, but mostly likely will come from something we fail to predict.

The second approach is based on equity capital and thus would not require such extraordinary insight from regulators. By design, it acknowledges that regulators cannot predict events and it ensures a safer system because well capitalized institutions are better able to withstand shocks and survive crises. Using simple leverage measures instead of risk-based capital measures eliminates relying on the best guesses of financial regulators to guide decisions.” End of quote.

Since the safer something is perceived the larger the potential for it to deliver an unexpected shock, it is of course only the second approach that can be the valid one… and the only thing we would pray for, is for that very careful attitude and steady hand required for getting us from here to there, without making it all so much worse.

Mr. Hoenig. Show your colleagues very carefully the right very careful way! There are more than enough regulatory Taliban out there.

Just asking for 20-30 percent capital requirements for banks is just playing for the galleries.

PS. Personally I would gladly settle for a goal of 8-12% of capital against all assets thereby getting rid of the worst part of current regulations, namely how the risk-weighing distorts the allocation of bank credit. How to get there? I have my ideas and the one I most like is inspired by how Chile capitalized their banks in 1985.