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posted on 14 March 2016

Has The Basel Committee Forgotten The Purpose Of Banks?

Written by , A View from the Radical Middle

John Lounsbury, writing on a lead from Joe Bongiovanni, has made us aware of a working paper by Hyman P Minsky, from October 1994, titled "Financial Instability and the Decline (?) of Banking: Public policy considerations". Hyman P Minsky stated the purpose of banks, but all Basel Committee regulators seem to care about is avoiding credit risk.

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Lounsbury writes:

"Minsky was concerned in the early 1990s that what he thought were the two roles of banking in a capitalist society were being performed to a decreasing extent by organizations that were chartered as banks."

The two primary functions of banking he describes as (1) supplying the means of payments; and (2) channeling resources into the capital development of the economy.

Minsky argued that this separation of banking from the real economy would diminish the role of central banks in influencing the economy in the traditional manner through monetary policy. Given this loss of influence through the traditional tools of "changing the availability or cost of financing". He felt that the variable remaining would be management of "uncertainty".

He argued that the changes in banking required regulation to be rethought.

And I ask, for the umpteenth time. What has the pillar of current bank regulations, the risk weighted capital requirements, to do with banks fulfilling efficiently those two primary functions?

The answer: Absolutely nothing. But it is even worse than that, since the risk weighing totally distorts the allocation of bank credit to the real economy.

The current bunch of regulators holed up in that small mutual admiration club known as the Basel Committee for Banking Supervision, regulated our banks without even asking themselves what the purpose of our banks is.

They must be held accountable for that, and publicly paraded down our avenues wearing dunce caps.

It seems like it all started during a dinner in London on September 2, 1986.

A version of this article appeared at My Voice and Noise on Subprime Bank Regulations 13 March 2016.

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