The Past Speaks

Matt Yglesias has published a great summary of the debate over the debate over the proposed regulations for bank capital adequacy in the United States. Yglesias’s piece is interesting because it deals with an intrinsically important issue (how to regulate banks so as to reduce the chances of future financial crises) and because it undermines that widespread view that the net burden of regulation is always greater in social-democratic Europe than in the United States. Ygelsias shows that the plans to impose a 5 percent equity ratio on the biggest banks are being fought tooth and nail by the said banks and their spokesman, Tim Pawlenty, the former Minnesota governor who now runs the Financial Services Roundtable.  Pawlenty has argued that the proposed 5% rule would disadvantage US banks relative to their competitors in Europe, where a requirement of just 3% is currently under discussion. 

Yglesias makes this apt comparison with environmental regulation:

Since both American and European banks are supported by their respective governments when they get into trouble, if European regulators let European banks take bigger risks than American regulators allow the European banks will be at an advantage.

The question citizens have to ask is whether this is a good reason for lax regulation. A country with stricter air pollution rules puts its manufacturers at a disadvantage. On the upside, it gets cleaner air. By the same token, a country with a stricter leverage ratio will have a smaller and less lucrative banking system than a country with a laxer one. On the upside, it gets fewer financial crises. To the extent that you think a big problem in America is that our banking sector isn’t sufficiently large or profitable, Pawlenty’s concerns should weigh heavily on your mind. To the extent that you’re more worried that our banking sector is excessively crisis-prone and bailout-dependent, Pawlenty’s concerns seem less compelling.