Definition of capital, capital, capital

The reform strategy of US Treasury Secretary Tim Geithner (2009) focused on requiring banks to hold bigger buffers against losses, hence he is associated with the mantra that “capital, capital, capital” is the way to prevent future financial crises.

This approach has three main weaknesses.  First, it relies on the international Basel negotiations to raise capital requirements.  Powerful countries, such as Germany and France, are opposed to significantly strengthening capital. 

Second, the details of implementing capital requirements are left to regulators; in the past, banks have found it easy to lobby for lax rules. 

Third, even if capital requirements are raised for banks, this will tend to push financial transactions (and the weight of balance sheet risk) towards the relatively unregulated shadow banking system.

It remains to be seen exactly how this strategy dovetails with the existence and expansive mandate (on paper) of the Financial Stability Oversight Council. [1]


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