Agreement reached by the major industrialized nations at the end of 2010 in anticipation of possible regulations in Basel III, according to which national supervisory authorities can force domestic banks to increase their capital ratios as soon as there are indications of a bubble. The measure of a bubble is to be the ratio of credit to gross domestic product. The buffer thus imposed is intended on the one hand to protect banks from losses and on the other to deflate the bubble (while the buffers are designated to protect banks, they are also likely to raise the price of credit which could help to deflate a bubble). However, in order to prevent loans from being taken out abroad to finance the bubble, the supervisory authorities of other countries should also join this measure. – It was questioned whether such reciprocal arrangements would be implemented in an emergency. After all, let’s assume that a bubble is discovered to be in the making in England. The banks there are now forced to increase their minimum tier one capital ratio from the global minimum of 7 percent to up to 9.5 percent. However, this means that all loans become more expensive, including loans to improve or expand the production apparatus. Economic growth is therefore reduced. According to the agreement, however, the ECB and the Swiss National Bank, for example, would now also be forced to demand more core capital from their banks. They would therefore have to accept growth losses in their respective economies (because the impact of the extra capital requirement is expected to be greater on its economy than on banks). It seems rather unlikely that this will happen (remote). – Basically, however, it is the right way to leave the responsibility for loans of all kinds as far as possible with the banks. It has been proven that this is the best way to avoid financial crises. – See investment liability, market knowledge, central banking, Martin principle, moral hazard, buffer. – Cf. Deutsche Bundesbank Monthly Report, April 2013, p. 52 (definitions).
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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
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