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A Little Lovin’ For Big Banks

June 2, 2010

Fama argues “the only solution is to raise capital requirements of these firms dramatically,” maybe up to 40-50 percent, which is an idea we have also advanced.  It’s an interesting question whether this by itself would take the failure of mega-banks completely off the table – that would probably depend on the extent to which they were allowed to game the system, for example with risk taken through derivative positions against which they hold too little capital.

Still, Fama is thinking along exactly the right lines – and this is further confirmation that the consensus on big banks is shifting.

If implemented properly, capital requirements of the kind he proposes would essentially force the largest six or so banks today to become much smaller.  Given that capital requirements are set by regulators, who claim to be pro-market, they should take careful note of Fama’s views – and look for ways to implement a tough version of this approach.

Baseline

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