We need to rewrite bank regulation from scratch before accidents are unmanageable

Sir Martin Wolf asks “how do banks get away with holding so little capital that they make the most debt-laden of private equity deals in other industries look well capitalized?”, “Why banking remains an accident waiting to happen”, November 28.

Mr Wolf could do well reading carefully the minimum bank capital requirements that have been imposed on the banks by their regulators. There he would see that if the banks lend to the public sector, or to creditors qualified as utterly safe by the credit rating agencies, such as securities backed by subprime mortgages, they need very little capital. If, on the contrary they would want to give credit to an unknown and not to well capital endowed entrepreneur, who might help to create those decent jobs the society needs, then the bank has to put up a lot of capital. With this incentive structure guess which route the banks are taking?

Wolf also mentions Henry Kaufmann’s suggestion to submit to special intense scrutiny banks that are deemed “to big to fail”. As the failure of any of this to big to fail banks would clearly have much worse consequences for the world than a little Northern Rock has, I have always suggested that the best way to insure us against the putting all the eggs into the same basket risk, is a small progressive tax on the size of banks. We might lose out on some of the economies of scale, but then again we have always been told that you can’t have the cake and eat it too.