Tags: Meltzer | banks | Capital | Rules

Allan Meltzer: Banks Need More Capital, Not More Rules

Thursday, 17 May 2012 06:53 AM

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Carnegie Mellon economist and visiting Hoover Institution fellow Allan Meltzer says politicians are wrong when they say that more regulation equals more protection.

"The JPMorgan mistakes that resulted in a loss of $2 billion or more have awakened some senators to the fact that the Dodd-Frank financial-regulation legislation of 2010 did not prevent errors of judgment and investment losses," Meltzer writes in The Wall Street Journal, but the big investment bank has more than enough equity capital to cover its losses several times over.

"Banks' equity capital protects the general public from financial losses much more effectively than regulation," says Meltzer. "Increasing equity capital means that a bank's stockholders are the ones who absorb the losses that taxpayers were forced to accept in 2008."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

"You won't find that improvement in Dodd-Frank."

Meltzer notes that regulation is often several steps behind practice. ”Like other markets, banking markets are dynamic, producing new and different types of risk-bearing instruments,” he says. “Further, dynamic markets find ways to circumvent regulation.”

Moreover, Meltzer says, the U.S. economy can’t grow unless investors are free to finance risky assets. “Our future will be much poorer if we convert the banking system into an ever more heavily regulated group of companies,” he says.

“Congress should repeal Dodd-Frank and mandate higher capital requirements. Making bankers bear the risks they undertake is the best way to limit those risks.”

The New York Times reports that the overall health of JPMorgan remains strong, even with the additional losses, and the bank has been able to increase its stock dividend faster than its rivals because of stronger earnings and a more solid capital buffer.

Editor's Note:
I Wish I Were Wrong — Economist Laments Being Right. See Interview.




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