Is Bank Regulation This Easy?
By Arnold Kling
governments should fully guarantee all bank deposits and impose much tighter restrictions on risk-taking by banks.
I emailed him to say that I thought that this assumed that regulators would know when banks are taking risks. I am not sure this is true. He replied that we managed not to have bank failures for two decades. Here is my response:
When we have a period of no bank failures, that could be because banks aren’t making bets. Or it could be because their bets are working. It is hard to tell the difference until after the fact. If you had asked regulators as late as 2006, they would have told you that the banks weren’t making bets. Instead, new, better methods of risk management were in play. What we know now is that the bets they were making had been working because house prices kept going up.