Edited by Thorsten Beck - Vox

The ratios are:
The Future of Banking
• Too rigid. As they are fixed, they need to be set tight enough to be adequate all the
time. As a result they are easily characterised as very expensive, and create massive
resistance.
• Not countercyclical. In fact, buffers are clearly procyclical (Perotti and Suarez
2010). The reason is that buffers discourage aggregate net liquidity risk only if they
are costly. But in good times, the wholesale funding spread for banks is minimal
(it was basically zero in 2004-07), while it jumps in a crisis. So unstable funding
exposure is not discouraged, and net exposure will be the same as without buffers.
Even ex post, buffers are clearly insufficient to contain systemic runs.
• Very distortionary (relative to charges). They penalise the more efficient lenders,
which will be rigidly constrained. This is analogous to the reason why quotas are
usually less efficient than tariffs.
On the positive side, quantity limits on unstable funding are a robust solution when
banks are very undercapitalised. In that case, many banks are too prone to gambling to
rely on charges alone. Yet in practice, when banks’ capital ratios are weak, authorities
are forced to offer extensive liquidity support, and to abandon tight standards. So ratios
would work because they are very constraining, but will not be used precisely because
they are.
It is extraordinary that contrary to a broad academic consensus, central banks’ lists of
macroprudential tools do not consider alternatives to ratios, even though the approach
is at serious risk of derailment.
• The ratios have been successfully portrayed as very tight (as perhaps they need to
be since they are set once and for all), and unaffordable in the current climate. The
US regulators are currently under heavy lobbying pressure, and given the political
climate, they are unlikely to adopt very tight recommendations. Inexplicably, the
European Commission has neglected any reference in its CRD4 report to the most
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