Posted by on June 5, 2019 11:32 am
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Tired of talking about Brexit? Don’t worry, we can talk about the “rot at the heart of the banking system” instead! The Adam Smith Institute has a new white paper outlining the continuing vulnerabilities of the British financial system, which are due in large part to misguided and counterproductive financial regulations, and suggesting ways to stop the dry rot.

 

 

  • The paper, titled “What a Capital Idea!” (get it, old thing?) notes that the underlying dynamics of a bank run have changed very little over history: it’s when everyone wants their money back and the bank doesn’t have enough.

 

 

  • Further, current laws and regulations are ineffective to the extent that they create moral hazard: government deposit guarantees basically free depositors from the need to make sure the bank is really solvent, and allowing the bank itself to engage in riskier behavior.

 

 

  • Banks should be forced to raise money like other businesses, the authors argue – by selling stocks and bonds.

 

 

  • The authors cite the U.S. “CHOICE” act, which allows banks to choose from one of two paths: one with lower capital reserves (and therefore more risk) and more regulation, the other with higher capital reserves and exemption from many regulations.

 

 

  • They also suggest “strictly unlimited” liability for senior bankers – sure to be a popular idea (with non-bankers anyway!).