Page 33 - Monocle Quarterly Journal Vol 1 Issue 1 Q4

BAd medIcINe ANd the Body ecoNomIc
nor scal policy that will be deemed the cause of a prolonged period of painful middling growth coupled with rising inequality. It will rather be the macro-prudential response in terms of international, yet oftentimes, con icting regulatory intervention that will be held accountable.
e conduit to monetary policy, as well as the vehicle that enables and leverages scal policy, is the banks. And they have been handcu ed and held in solitary con nement through a plethora of vast, politically- inspired and derelict regulations that have been imposed on a regular and sustained basis against them for the past decade.
Regulations such as FATCA and Automatic Exchange, which aim to rein in tax-evaders, have been imposed at the cost of banks, which are now held responsible for implementation and execution – e ectively turning banks into extensions of the tax authorities and the Department of Justice.
Market manipulation of interest rates has led to few individual criminal arrests, but rather has led to punitive nes on the institutions that are meant to enable growth through lending. ese nes have been of such incredible proportion that they have e ectively wiped out large chunks of annual retained earnings from bank balance sheets, making it even more di cult for these banks to increase their capital levels.
en there are the adjustments under Basel III of these same capital levels – e ectively doubling the Tier-1 capital requirement. is means that banks must, in order to achieve the required capital levels, either increase retained earnings or decrease lending. And it means that banks are now, counter-intuitively, more likely to fail rather than less likely. It seems clear and logical that the harder you make it for banks to meet capital requirements, the greater the likelihood that they will not meet them.
To really add salt to the wound, bank regulators introduced annual stress tests that impose hypothetical stresses on bank balance sheets that are already su ering from real-world stresses. e absurdity of this was made clear recently during European bank stress test season. Several banks fell short on stressed capital tests primarily owing to the combination of real- world and hypothetical scenarios taking e ect simultaneously. e stress tests in their conception never considered the Brexit e ect, but that e ect was embedded in bank balance sheets before the hypothetical tests were even applied.
“Market manipulation of interest rates has led to few individual criminal arrests, but rather has led to punitive nes on the institutions that are meant to enable growth through lending.”
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