MurrayL

Relax Basel II's Bank Capital Adequacy Requirements

When a bank makes a $200,000 'liar' loan, it did it with about 4% of its money and 96% of funds provided by depositors. The depositors lent money to the banks in anticipation that they would get it back. The capital adequacy requirements exist to ensure that the bank has its own money on the table when it makes the lending decision. It would be great if the banks accepted that they had a fiduciary responsibility for monies entrusted to them, but that is probably unrealistic, so we have capital requirements. The current crisis has shown that they are inadequate - how we arrived at the position that it was OK to run a business with 4% equity will bother us for some time.
But to suggest that the current minimal capital requirements should be weakened further is absurd. This is just a licence for more trouble. If the industry cannot learn to ride with the current trainer wheels, it isn't time to take them off!