Paul Lachine

Bank Regulation’s Capital Mistake

Reversing the gigantism of banking ought to be the top financial-reform priority. Instead, the debate over bank regulation has been dominated by noisy – and pointless – discussion of banks' capital requirements.

MEDFORD, MASSACHUSETTS – Imagine that the arguments triggered by the Hindenberg disaster were about the fire extinguishers and parachutes that airships should carry, rather than about the design flaws that might cause them to ignite. Unfortunately, today’s debates about banking reform have just this character.

Reversing the robotic gigantism of banking ought to be the top priority for reform. Bankers were once supposed to know every borrower, and to make case-by-case lending decisions. Now, however, banks use models conjured up by faraway financial wizards to mass-produce credit and a range of derivative products. Mass-production favors the growth of mega-banks, so, unlike the misjudgments of lending officers, these behemoths’ defective models have had disastrous consequences.

Radical proposals that would help restore a more resilient system, offered by the likes of Governor of the Bank of England Mervyn King, have been smothered by noisy discussion of measures that do nothing to address modern banking’s fundamental defects.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

http://prosyn.org/5QM8j8E;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.