Safer, but Not Safe Enough

John Vickers

doi:10.3390/jrfm12030152

Abstract

The great divide between official analyses and economists’ views of optimal bank equity capital is not as wide as appears at first sight if the economics of risk is properly addressed. Adapting the BoE’s analysis to take account of abnormal risk conditions, a less benign view of the effectiveness of resolution regimes in systemic crisis, an international rather than domestic perspective, and a consistent approach to risk, takes one a good distance towards the economists’ view. The economic rationale for capital levels in the region of Basel III is left looking thin. It looks thinner still when, as now, price-to-book ratios are calling regulatory capital measures into question for some important banks

Highlights

The October 2018 Global Financial Stability Report by the IMF was entitled A Decade after the Global Financial Crisis: Are We Safer? The answer is Yes
Thanks to a host of policy reforms overseen at international level by the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB), the financial system is considerably safer, albeit safer than not very safe at all
Separation between retail and investment banking is especially important for the banking system of a country, such as the UK, that is a global financial centre, it is disappointing that structural separation measures have been rather limited internationally, despite the attempt made in the EU by the expert group chaired by Liikanen (2012)

Summary

Introduction

The October 2018 Global Financial Stability Report by the IMF was entitled A Decade after the Global Financial Crisis: Are We Safer? The answer is Yes. On the core question of equity capital in the banking system, did Basel III go far enough?. How well banks and their functional equivalents are capitalised is one of the fundamental policy questions for an economic system. It is a question on which there is an astonishing gap between the mainstream “official” view and the mainstream “economist” view. A ten-years-on stage of reform fatigue is no time for silence on such a fundamental question, especially when there is a growing chorus calling for an easing of policy. The ICB thought that the Basel baseline CET1/RWA ratio of 7% was “clearly insufficient for systemically important banks”. 1 ‘Banking reform nine years on’, 18 September 2017, available via voxeu.org. 2 (ICB 2011a, pp. 70–71). 3 Published as Shin (2009)

The Great Divide

Economics of Risk

Findings

Conclusions