We need to impose far higher bank capital requirements than those set out in the BaselIII standard, but we must also use reserve requirements directly to limit banks’ money creation capacity.
We should change tax regimes to reduce the bias in favour of debt finance and against equity. We should equip central banks as macroprudential regulators with powers to impose far larger countercyclical capital requirements than have so far been established. We should place tough constraints on the ability of the shadow banking system to create credit and money equivalents, and must not be diverted from that path by spurious arguments about the dangers of inadequate liquidity in credit markets.
We should use public policy for a different allocation of credit than would result from private decisions, deliberately leaning against the private bias toward real estate and, instead, should favour other potentially more socially valuable credit allocation. Minimum risk weights that determine the capital needed to support the categories of lending should be set by regulators, and not on the basis of individual banks’ assessments of risks.
Constraints on mortgage borrowers through maximum loan-to-value and loan-to-income ratios play an important role. We should be willing to place some limits on the free flow of international capital; fragmentation of the financial system can be a good thing.
From “Between Debt and the Devil: Money, Credit, and Fixing Global Finance”