The Next Revolution in our Credit-Driven Economy

Chapter 5Why Capitalist Bankers Create Soviet Banking Models When the Going Gets Rough

One of the most fascinating conversations I had in recent years was with a banker who worked for one of the major global banks for 30 years. He agreed with my analysis and was perplexed by something. It was a profoundly simple problem. If the loan/deposit ratio (LDR) is seen as a reliable marker for excesses, and an ideal LDR for all countries to avoid economic catastrophe is about 1.1× maximum, then why doesn't the Bank of International Settlements (and other central banks) use the LDR as a standard marker for bank safety instead of some arbitrary capital measurement? So much damage has been done by tinkering around with capital ratios while ignoring the much larger issue of domestic liquidity and the dangers of foreign wholesale borrowing.

Like central banks, the Bank of International Settlements (BIS) is de facto owned and operated by the banks and is not directly accountable to governments. Indeed, its physical premises are legally sovereign territory and local police may not enter under any circumstances. (An excellent treatment of the history of the Bank of International Settlements is called Tower of Basel by Adam LeBor.) The BIS was originally set up in 1930 to monitor the egregious and eventually suicidal war reparations placed on Germany to pay for damage it had done during World War I in terms of destroyed land, property, and life. This payment system of reparations, as many predicted, ...