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July 17, 2013

Frantic Rule-Writing Won’t Avert New Banking Crisis

Five years after the great financial meltdown, have the U.S. and other advanced economies done enough to head off the next calamity? The short answer is no. 

There’s been frantic activity, all right. Heroic feats of legislation and rule-writing will keep regulators, compliance officers and analysts busy for years. But the gain in safety from all this is likely to be small — too small, probably, even to offset the danger created since the crash by greater concentration in the finance industry. Once the residual fear from the last crisis fades and the appetite for risk revives, financial systems might be more at risk than before, not less.

The emerging framework of regulation is no great departure from the one that failed in 2008 (USRINDEX). There’ll be no reinvention of finance — it will be business mostly as before, within slightly tighter (and far more complicated) bounds. Rethinking from first principles? Maybe next time.

The best part of the efforts to date is the plan to make banks increase their loss-absorbing capital. By guarding against the risk that relatively small losses might render a bank insolvent, extra capital makes the system safer. It also cuts the implicit subsidy enjoyed by banks deemed too big to fail.”

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Read full Bloomberg article here

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