Even After Volcker, Banks Aren't Safe Enough

The fine print in the new rule shows the extent to which the financial system is still vulnerable

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There's a case to be made that the industry might grow more robustly if bankers were forced to separate lending from trading. Many of the largest and most complex firms trade at a discount from their book value, suggesting that the market isn't so confident about their future performance. Certainly having more lenders rather than fewer would help other kinds of businesses, and having trading walled off from lending would encourage that. The fact that the five largest U.S. financial holding companies control 55% of industry assets--compared with 20% in 1990--keeps competition low and credit constrained.

So where do we go from here? hoenig believes that in the next two to five years, there will likely be another crisis or trading loss of the kind that reignites the debate over closing trading loopholes and creating a truly safer financial system. Reformers like him believe that there should be limits, for example, on the amount of borrowed money that banks can use to conduct their daily business. Right now, banks complain about rules that would require them to hold a mere 5% of their assets in high-quality, low-risk capital (known as Tier 1 capital), despite the fact that in any other industry, doing business with less than 50% of your own cash would be considered extreme.

There is a rising chorus of reform voices that would like to see banks holding more like 15% to 20% of their own capital. That was the average held by the major New York--based institutions in the run-up to the financial crisis of 1929--which is one reason none of them went under back then. As the U.S. recovery gains steam and memories of the 2008 crisis fade, here's hoping we haven't lost our last, best chance to create a safer system.

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