Amar Bhide on Bank Regulation

He writes,

Regulators then shifted to edicts requiring banks to maintain a specified capital cushion, thick enough to cover potential losses. This approach presupposes that bank assets and exposures can be accurately measured. In fact, the financial statements of mega-banks are impenetrable works of fiction or wishful thinking.

I wish that the debate about bank regulation were focused on logic and analysis. Instead, the big battle is over narrative. The left insists that the narrative of the crisis should be "too little regulation," while some on the right insist that it should be all about housing policy. I think that housing policy was one factor in the crisis, but I think that faith in regulation, particularly in the sort of mechanical capital regulation that Bhide derides, was also a factor.

Unfortunately, we are returning to faith in regulation. We are layering on "too big to fail" with "too regulated to fail," and that is exactly the wrong approach, in my opinion. Too regulated to fail is an oxymoron.

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