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The US must hold firm on bank capital rules

The Honorable Sheila C. Bair
 

By Sheila Bair (original source Financial Times)

“Irish dramatist George Bernard Shaw once opined that to know nothing and think you know everything points to a political career. Members of the US Congress wandering into the complicated subject of bank capital must have taken his advice. Few things are more complex than rules designed to constrain excessive borrowing by large “systemic” financial institutions. There are “leverage ratios” — relatively simple metrics that require a bank to hold a minimum amount of equity relative to total assets — and “risk-weighted ratios” that specify equity minimums based on the perceived riskiness of a bank’s holdings.

US politicians, with some help from regulators, are trying to weaken these rules, setting a dangerous global precedent. Both Republicans and Democrats supported legislation giving the three largest US custody banks an average of a 20 per cent reduction to their leverage ratios.”

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