Keeping Banks Small

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I promise not to bore you forever on the subject of limiting bank size, but here’s a suggestion from Willem Buiter that seems to make sense.  It’s part of a list of proposed regulatory reforms:

(2d) There has to be international agreement on restricting the size and scope of financial institutions.  Aggressive enforcement of anti-monopoly policy and the imposition of capital requirements that are increasing in the size of a bank (for given leverage and risk) would be two obvious tools for achieving this.

This seems both better and more workable than a flat cap on assets.  What he’s suggesting is that the bigger a bank gets, the higher its capital ratio should be.  This accomplishes two things: (1) it puts natural downward pressure on bank size since higher capital requirements reduce leverage and profitability, and (2) if a bank gets big anyway, the higher capital ratio makes it less likely to fail and cause systemic problems.  Sounds reasonable to me.

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