In the attached article Stephen Gandel discusses how the new Fed imposed capital requirements for banks will do little to mitigate risk.
First, all the rules don’t go into effect until 2016, so there’s still plenty of time to score a few Christmas bonuses between now and then for leverage happy bankers.
Second, the new requirements are not that remarkable. Banks must now keep 7% of their investments on hand. Up from 5%. Big deal.
It’s a move in the right direction but not a big enough move.
Of course if we had a free banking system all this would be moot.
“Critics of the rules have said that banks have to be allowed to take risks. Don’t worry. Banks will still be allowed to make plenty of ill-advised loans. After the financial crisis, people were shocked to find out that banks were able to lend out $30 for every $1 in capital they had on hand. Under the new rules, the banks will still be lending out $14 for every $1 in capital they hold. Put another way, the banks end up out of business if on average two out of every 14 loans they make go bust. Seems like the banks are still plenty risky.”