How I Learned To Stop Worrying And Love Higher Capital Requirements

Now that I’m finished with The Bankers’ New Clothes I’m persuaded. Read my column on the book here.

More schematically, if I have a problem with the book it’s that in their quest to debunk myths about the problems with massively raising bank capital requirements Anat Admati and Martin Hellwig in many ways end up underselling the power of their idea. This is a way to make the banking system safer and drastically reduce the need for bailouts. But it also addresses a lot of the wider social and economic concerns people have about the political economy of the past 15 years or so. A world of higher capital requirements should shrink the profitability of the financial sector somewhat, shrink its overall size somewhat, and rebalance lending behavior somewhat away from consumer debt and toward productive investment.