Which of these competing arguments do you believe? You might think that banks should stockpile bigger cushions of capital so that taxpayers will not have to bail them out during the next financial crisis. Alternately, you may believe that higher reserves mean less money for banks to lend out, money that could lubricate the wheels of commerce. Banks generally believe the second proposition and there is word today the view of the banks is winning.
In a fascinating development reported by the Financial Times, international bank regulators are expected to ease off the new capital requirements that were supposed to be phased in. A bank industry group is playing the powerful jobs card. The Institute for International Finance says new bank rules set up to protect the banking system after the last collapse could ultimately cost 7.5 million jobs worldwide. Lower economic growth because of an increased cost of borrowing is the argument. Critics say banks without enough reserves on hand to handle a crisis is in itself destabilizing to the world economy.
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