"Traditional Banking" Is Indeed Risky
Letter to the Editor

Sir, Clive Crook ("Beware the crisis around the corner," January 4) points out that failed commercial banks "did so mainly through losses in traditional banking." Yes, just as they do each cycle. "Traditional banking," consisting of highly leveraged positions in risky assets, is indeed risky. No one should ever think the contrary.

Mr Crook goes on to say there should be "rules that recognize the credit cycle and change as it proceeds." Right again. The essential new rule of this sort would be that as asset prices accelerate and optimism grows, banking leverage and loan to value ratios must fall, instead of rising, as they typically do.

That the typical financial behavior should thus be made into its opposite is clear in principle. How actually to achieve this, if we exclude illusory faith in regulation, is admittedly murky.

Alex J. Pollock is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author


Alex J.

What's new on AEI

Poverty in America—and What to Do About It
image GDP for second quarter: Strong headline, weak innards
image Paul Ryan and the emerging conservative reform agenda in higher education
image Democrats' impeachment fixation
AEI on Facebook
Events Calendar
  • 28
  • 29
  • 30
  • 31
  • 01
Tuesday, July 29, 2014 | 10:00 a.m. – 12:00 p.m.
Is Medicare's future secure? The 2014 Trustees Report

Please join AEI as the chief actuary for Medicare summarizes the report’s results, followed by a panel discussion of what those spending trends are likely to mean for seniors, taxpayers, the health industry, and federal policy.

Friday, August 01, 2014 | 10:30 a.m. – 12:00 p.m.
Watergate revisited: The reforms and the reality, 40 years later

Please join us as four of Washington’s most distinguished political observers will revisit the Watergate hearings and discuss reforms that followed.

No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.