He who places his hope on thee, O Virgin all-glorious, will prosper in all he does.

Inscription on Byzantine coin during reign of Romanus III

Monday, October 04, 2010

Bank Capital

Two proposals to prevent the violent swings of the business cycle appeared in the news today.

1) "...proposals, which are backed by the Swiss National Bank and the country's financial regulator FINMA, would require both banks to hold reserves of 10 percent in common equity and 19 percent in total capital by 2019."The so-called Basel III rules agreed by governors of major central banks in September require reserves of 7 percent and 10.5 percent respectively, though the composition of those reserves is slightly different from the Swiss proposal."

In my view, even the Swiss proposal doesn't go far enough. Nothing less than a 100% reserve requirement will prevent violent business cycle swings.

2) The International Monetary Fund recommended that regulation be extended to non-bank financial firms, such as hedge funds and insurance companies, to lessen systemic risk. I almost forgot: the IMF thinks that derivatives should be regulated, too.

What a surprise. The statists at the IMF have never seen a private entity that they haven't wanted governments to control. Other than a personal preference for financial regulation, however, the IMF hasn't pinpointed the role that non-banks played in the most recent downturn, other than a magnification of bank-originated leverage.

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