How Much Capital Should Banks Hold?
Sir John Vickers has published a VoxEU piece which is highly critical of the Bank of England's recent 'tame' proposals regarding the amount of capital banks should be required to hold. He argues persuasively that banks need to hold much more capital than suggested by the Bank. He is not alone. Stanford's Anat Admati has recently argued that capital regulation is deeply flawed in terms of its design and the limited amount of capital banks are required to post - click here.
In my book, Banking in Crisis, I make the argument that bankers need 'skin in the game' to make banking stable. How much skin should they have? Historically, bank shareholders stood to lose more than their investment in the bank due to extended shareholder liability regimes. In other words, they stood to lose much more than their skin in some cases! This, I argue, resulted in stable banks that acted conservatively, which in turn promoted banking stability.