Edited by Thorsten Beck - Vox

The Future of Banking
charged ‘prudential risk surcharges’ on the difference between the desirable and the
actual ratios.
Risk charges may start quite low, certainly in a confidence crisis.
These fees would not reflect a direct insurance promise, but reflect the risk externality
caused by individual bank strategies on systemic liquidity risk. As such, they represent
a non-fiscal form of ‘bank taxation’ which targets risk creation, rather than transaction
volumes.
The banks which would be more affected are those with the lowest retail deposits,
which have expanded their balance sheets by relying on wholesale funding. This would
rebalance the current bias where non-deposit funding is de facto insured but evades
insurance charges.
The critical feature of ratios is that they may be adjusted countercyclically to stem
excess growth of unstable funding. Raising charges would be much easier than adjusting
ratios, as they have lower adjustment and disruption costs than quantity adjustments
(which as a result are usually delayed for years).
Charges would be less rigid than absolute ratios, enabling individual banks to optimise
their adjustment over time. Public disclosure would be limited to aggregate volumes.
The presence of the charges would ensure that:
• Supervisors would be able to monitor on a constant basis the liquidity risk buildup
at the individual and system level.
• All banks will be induced to monitor the difference between the desired and current
liquidity standing. Up to 2008, most large banks did not have a central tracking of
their liquidity exposure.
• Risky strategies could be discouraged in good times without raising interest rates.
• At present, the authority for imposing such charges would lie with national central
banks. For some, this step would require legislation.
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