Banking crises are not bolts from the blue

croaking cassandra

The Herald’s economics columnist Brian Fallow devoted his column last Friday to the Reserve Bank’s proposal to massively increase the proportion of their balance sheets banks would have to fund by equity.  He ended on what seemed to be a moderately sceptical note.

So we are left trying to weigh a highly debatable but significant cost against an incalculable benefit.

As I’ve noted here, the sort of cost-benefit calculus we can glean from various Reserve Bank publications just doesn’t stack up at all.    In his speech the other day (which a couple of readers have suggested I was too generous towards), the Deputy Governor indicated that the level of GDP might be up to 0.3 per cent lower (permanently) as a result of these change.    Call it an annual insurance premium of 0.25 per cent of GDP (and bear in mind that the estimates Bascand is using don’t…

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