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Love the Bank, Hate the Banker

NEW DELHI – Public discourse is rarely nuanced. The public’s attention span is short, and subtleties tend to confuse. Better to take a clear, albeit incorrect, position, for at least the message gets through. The sharper and shriller it is, the more likely it is to capture the public’s attention, be repeated, and frame the terms of debate.

Consider, for example, the debate about bank regulation. Bankers are widely reviled today. But banking is also mystifying. So any critic who has the intellectual heft to clear away the smokescreen that bankers have laid around their business, and can portray bankers as both incompetent and malevolent, finds a ready audience. The critic’s message – that banks need to be cut down to size – resonates widely.

Bankers can, of course, ignore their critics and the public, and use their money to lobby in the right quarters to maintain their privileges. But, every once in a while, a banker, tired of being portrayed as a rogue, lashes out. He (it is usually a man) warns the public that even the most moderate regulations placed on banks will bring about the end of civilization as we know it. And so the shrillness continues, with the public no wiser for it.

A more specific example drives home the point. A significant number of banks operated at very high levels of leverage prior to the recent crisis, with debt/equity ratios of 30-1 (or more) in some cases, and with much of the debt very short-term. One might reasonably conclude that banks operated with too little equity capital, and too little margin of safety, and that a reasonable regulatory response would be to require that banks be better capitalized.