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Thursday, 18 July 2013

Capital Requirements Won’t Save Us

By Frank Shostak

On Tuesday July 2, 2013 US central bank policy makers voted in favor of the US version of the global bank rules known as the Basel 3 accord. The cornerstone of the new rules is a requirement that banks maintain high quality capital, such as stock or retained earnings, equal to 7 percent of their loans and assets.

The bigger banks may be required to hold more than 9 percent. The Fed also drafted new “leverage ratio” rules to limit how much banks can borrow to fund their business.

However, the introduction of new regulations by the Fed cannot make the current monetary system stable and prevent financial upheavals.

The main factor of instability in the modern banking system is the present paper standard, supported by the existence of the central bank and fractional reserve lending.

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