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By Raghuram Rajan
Published: January 25 2010 22:12 | Last updated: January 25 2010 22:12
The US administration has switched hesitancy for populism in proposing size and activity limits on America's largest banks. While details are still missing, possibly because no one really knows how to implement size limits or curbs on proprietary trading, the intent is clear "“ bankers must pay. It is hard to have much sympathy for the bankers, who have brought the public's ire on themselves through incompetence and then through an outrageous haste to pay themselves. Yet outrage is a poor guide to public policy. Beyond being punitive, will the administration's proposals help reduce financial system risk?
Consider size limits first. The idea is to ensure institutions are no longer too big to fail. But how to define size? Whether you use assets, capital or profits there will be problems "“ banks will try to economise on whatever measure is limited.
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