This week Tim Geithner, US Treasury secretary, declared that the capital requirements in last year’s Basel III deal must be raised for large banks. Three days earlier Daniel Tarullo, Federal Reserve Governor, went further, suggesting as much as a doubling of the Basel ratios for the very biggest banks. Meanwhile Michel Barnier, European Union financial services commissioner, takes the opposite position: “We can’t rush forward,” he says. The radical reformers are lining up against gradualists. On any serious reading of the evidence, the radicals are right.
This fight is vital, because many other post-crisis financial reforms simply won’t deliver much. Take regulators’ new powers to wind up failing institutions and impose losses on bondholders – powers that are supposedly an alternative to taxpayer bail-outs. Such “resolution authority” counts for less than supervisors’ will to use it. In 1998 the Fed had no formal authority to wind up the hedge fund Long-Term Capital Management, and yet it did so anyway; in 2008, the US government did have authority to resolve the failing bank Washington Mutual, but the risk of bond market contagion caused it to flinch. Besides, most significant financial institutions are international. The brave new national resolution mechanisms will not be up to handling the challenges that count.
Or take another underwhelming innovation: the creation of systemic regulators to contain bubbles. Even conceding that these new supercops will know a bubble when they see one, it’s not clear how they can help. Right now, for example, there may be a tech bubble. But if the authorities choked off credit to Silicon Valley, tech companies could probably raise money elsewhere – from deep-pocketed angel investors who operate below the regulatory radar, from venture capitalists in Hong Kong or London, from foreign sovereign wealth funds and so on.