Should the Glass–Steagall Act, which prevented commercial banks from owning investment banks or vice versa, be reenacted?
Both accountancy and bank regulation have been moving in that direction, and it’s partly in response to Basel II. But in my view both accountancy and the regulation of bank capital ratios have become far too pro-cyclical. It requires banks and other financial institutions to have their minimum financial ratios at the height of the economic booms and their maximum ratios in the depths of recessions. Some of the banks have complained this isn’t even linear, meaning that the effect is multiplied as they enter recessions. It’s fairly obvious that regulators have got this the wrong way around. It is going to have to be reversed, which implies some real questions about whether Basel II can survive.Having high capital ratios as you go into a recession makes sense, but to require even higher ones at the bottom of a recession makes no sense at all; at times like that banks should be permitted to have much lower capital ratios.
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