Jaime says stop making so much money February 9, 2010 at 8:48 am
I like naked capitalism: it often has interesting things. One of them recently was an article about liquidity buffers. I have to confess to laughing, though, when I first read it. The august head of the BIS was rechristened cuddly Jamie Caruana. Jaime wouldn’t like that. In fact, he doesn’t like much. As NC says:
Caruna, argued at a secret (not) central bankers’ conference in Sydney that banks also need to carry more in the way of liquid assets… [He] recommended that banks hold enough to allow them to survive a month without access to funding. Note that idea only seems radical now, since banks have spent decades perfecting the art of running lean. The rule of thumb in banking is to lend out $9 of every $10 in deposits. In the 1960s, only $5 of loans versus $10 in deposit was considered prudent.
Certainly if Jaime gets his way then it will make for icy times for banks. But perhaps that is what we want. It would certainly be politically popular: the bonus problem goes away if banks are less profitable. It would of course be stability enhancing too. But in the long term, will finance ministers really be willing to put up with a cost of credit as high as it would be under these proposals. Perhaps ultimately this will be battle ground of 21st century regulation: those on the side of stability vs. those on the side of growth.
