Should-Read: Larry Summers: 5 Suggestions for Avoiding Another Banking Collapse

Should-Read: Larry Summers: 5 Suggestions for Avoiding Another Banking Collapse: “First, it is essential to take a dynamic view of capital…

…Second, a crucial challenge… is assuring prompt responses to deteriorating conditions that do not set off vicious cycles. Markets were sending clear signals of major problems in the financial sector well in advance of the events of the fall of 2008 but the regulatory community did not even limit bank dividend payouts, even after the experience at Bear Stearns, which had been deemed “very well capitalized” even as it was failing. Current experiences in Europe where some institutions have a price-to-book ratio of barely 0.35 and have not yet been forced to raise capital are not encouraging about lessons learned….

Third, regulators need to be attentive to franchise value…. Regulatory costs are an especially large issue for smaller banks…. Fourth, bankers may be more right in their concerns about increased costs of capital and its effect on lending than economists usually suggest…. Fifth, it is high time we move beyond a sterile debate between more and less regulation. No one who is reasonable can doubt that inadequate regulation contributed to what happened in 2008 or suppose that market discipline is sufficient…. At the same time, not all regulatory expansions are desirable…

May 22, 2017


Brad DeLong
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