Thursday, 15 May 2014

The IMF, TBTF and shadow banks.

I'm not impressed by this article by three IMF authors. They deal with "Too Big to Fail" banks. Well granted “Too Big to Fail” is a problem, but the crises in the US was largely a run on relative SMALL BANKS, i.e. shadow banks. The phrase “shadow bank” does not appear in the article.
So how do we dispose of TBTF plus deal with runs on shadow banks? Well how about this.
Have lending entities funded just by shareholders, not depositors, bondholders or any other type of creditor where the relevant bank liability is measured in a SPECIFIC NUMBER OF dollars.
That way, and in the case of shadow banks there is no motive to run. And as to large banks, failure of an entity funded just by shareholders is impossible. As George Selgin put it in his book on banking: “For a balance sheet without debt  liabilities, insolvency is ruled out…”.
And that system is called “full reserve” banking (aka 100% reserve banking). Sorry to keep going on about it.

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