An exchange between Charles Goodhart, Jeremy Bulow and Paul Klemperer.
12 November 2021
There has been a recent, important, paper by Bulow and Klemperer, entitled ‘Misdiagnosing Bank Capital Problems’. They argue (p.1) that “the regulatory system’s emphasis has been on more insurance rather than more capital”. Consequently, they note (p.3) that “Regulatory forbearance creates especially low capital requirements for the toxic assets that are the riskiest, encouraging insured banks to retain loans that would otherwise be sold and then, for ‘debt overhang’ reasons reject good new loans”.