More than making them safer, we need the banks to be more useful.

Sir Stephen Cecchetti affirms that the current proposals from the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS) that will impose higher capital and liquidity requirements on the banks is “A price worth paying to make banks safer”. It is just the same old story! When will we hear about making the banks more useful, or at least less useless?

Cecchetti correctly mentions that “lower capital means higher returns on equity but a smaller buffer against loan defaults and investment losses”. He ignores though the fundamental problem that the lower capital requirements are applied discriminating in favor of what is perceived ex-ante as having lower risks… and therefore increasing the returns of what is perceived ex-ante as having lower risks… and therefore pushing the banks to excessively invest in what is perceived ex-ante as having lower risks… precisely the stuff that financial and bank crisis are made of.

Eliminate the discrimination in the capital requirements and banks will start lending more to the small business and entrepreneurs who though most likely to be perceived ex-ante as more risky are also most likely to hold in their hands more of our future generation of jobs…which will thereby make our banks more useful.