David Brancaccio: The Federal Reserve has just approved a proposal to make every bank in America keep more money at the ready, to give the banking system a better shot at weathering the next financial storm. It is part of an international effort, known as Basel III that’s been resisted by many large banks.
Marketplace’s David Gura reports from Washington.
David Gura: The Fed’s rule would require most banks to hold more cash relative to their total assets. That’d be a cushion of capital.
Simon Johnson is an economist at MIT.
Simon Johnson: So, the idea is to have bigger buffers against losses, and to make it harder for financial institutions to fail, bringing down the world’s financial system.
Banks say holding cash as a buffer would make it harder for them to lend, but supporters of this new rule argue the money would come from other places.
Kenneth Rogoff teaches economics at Harvard. He says that, if a bank is getting all its money by borrowing, it is more likely to collapse when there is a financial crisis, because it’ll have trouble paying back its loans.
Kenneth Rogoff: If, on the other hand, a lot of its money comes from issuing stock, well, the shareholders bear the loss, and that’s no fun, but it’s automatic, and the taxpayer doesn’t have to step in.
Over the next three months, the Fed will accept comment letters critiquing the proposal. It’s likely many of them will be angry ones, from lobbyists for the banking industry who say higher capital requirements, and raising money through stocks, would be too costly.
In Washington, I’m David Gura, for Marketplace.
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