A thinktank claims the scope of the Independent Commission on Banking’s interim proposals is too narrow and should consider compulsory liquidity ratios and higher, more sophisticated capital reserve ratios.
The commission’s interim report calls for retail banks to be ringfenced within wider banking groups, with banks forced to hold a minimum of 10 per cent capital reserves for the retail bank and the group as a whole.
It said it will not make recommendations on liquidity because Basel III proposes measures to address liquidity problems.
But speaking to Money Marketing, New Economics Foundation monetary reform researcher Josh Ryan-Collins says: “The scope of the ICB recommendations is far too narrow. Capital adequacy is a loss-absorption technique rather than a direct control that would stop asset bubbles in the first place.
“If the ICB is going to limit itself to capital adequacy interventions, the minimum should be a lot higher but even, say, 20 per cent would not stop another crisis. We need restraints on liquidity and significant credit creation controls.”
The ICB report explains that banks exploit the current risk-weighted capital rules by choosing the riskiest assets for a given weight-risk.
Ryan-Collins says this, combined with innovation by banks designed to take risk off balance sheets, would undermine the “blunt instrument” of a bank-wide reserve requirement.
He says the power to apply wide ranging reserve requirements to different practices could be a powerful, targeted tool for the Financial Policy Committee with its mandate for financial stability.
Ryan-Collins says: “Higher reserve requirements on more speculative loans and lower requirements on more productive lending could limit asset bubbles like the one we have just seen in housing and enable strategic credit creation for things like infrastructure projects.”