July 22, 2013

You cannot ring-fence banks to live safe, in a vacuum, independent of the real economy.

Sir, Michael Barr and John Vickers argue that “Banks need far more structural reform to be safe” July 22, but as most navel gazing regulators, they seem to think banks could remain safe, as in a vacuum, effectively ring-fenced, independently of how the real economy is doing. Banks are more than some beautiful fishes to be looked at in an aquarium.

And in that respect, as long as ex-ante perceived risk of assets will allow for different capital requirements for the banks holding different assets, these will earn much different expected risk-adjusted earnings on their equity on different assets; which results in than the banks stand no chance of being able to efficiently allocate resources in the real economy; which results in that the real economy will falter; which will results in that banks, at the end of the day, are made unsafe, in a terminal way.