Headline : Nonsense and bad rules persist in banking

Read more from the original article on here at www.ips-journal.eu.

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In December, the CEOs of the eight largest banks in the United States participated in a three-hour posturing session before the Senate Banking Committee. It was a disheartening display that showcased the toxic blend of politics and asinine rhetoric that often characterizes discussions about banking.

Much of the hearing focused on proposed banking regulations known as the ‘Basel 3 Endgame’. Claiming to ‘translate’ the potential implications of this complex topic ‘for the average American’, Republican Senator Tim Scott stated that the proposed rules would lead to ‘fewer dollars to lend to Americans’. Bankers and several senators, including Scott, argued that by keeping a portion of the banks’ money ‘on the side-lines’, these regulations would prevent poor people from achieving the American Dream.

But these threats often originate from falsehoods, such as Scott’s suggestion that capital is something banks cannot use. In reality, as Democratic Senator Sherrod Brown noted, ‘absolutely nothing in these rules would stop banks from making loans.’ Instead, they would simply require banks to rely more on their own equity and less on borrowing to finance loans and investments. As the late US Federal Reserve Chair Paul Volcker famously observed, there is a lot of ‘bullshit’ in the debate about capital requirements.

Prudent banks insist on borrowers having ‘skin in the game’ when they lend, yet vehemently oppose regulations aimed at reducing their dangerous reliance on borrowing. Banks’ aversion to equity funding and addiction to borrowing enables them to shift costs and risks to others, ultimately benefitting at public expense. They often get away with it by keeping politicians and the public confused.

Read more from the original article on here at www.ips-journal.eu.

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