The Wall Street Journal Editorial Board Comes Out for a Straight 15% Equity Requirement

Carmen Segarra’s secret tapes from inside the New York Fed prompted a Wall Street Journal editorial about financial regulation. (You can jump over the paywall by googling the title: “Regulatory Capture 101: Impressionable journalists finally meet George Stigler.”)    Here is one key passage:

The journalists have also found evidence in Ms. Segarra’s recordings that even after the financial crisis and the supposed reforms of the Dodd-Frank law, the New York Fed remained a bureaucratic agency resistant to new ideas and hostile to strong-willed, independent-minded employees. In government?


Enter George Stigler, who published his famous essay “The Theory of Economic Regulation” in the spring 1971 issue of the Bell Journal of Economics and Management Science. The University of Chicago economist reported empirical data from various markets and concluded that “as a rule, regulation is acquired by the industry and is designed and operated primarily for its benefit.”

But what is most striking is the Wall Street Journal's endorsement of a simple 15% equity requirement:

Once one understands the inevitability of regulatory capture, the logical policy response is to enact simple laws that can’t be gamed by the biggest firms and their captive bureaucrats. This means repealing most of Dodd-Frank and the so-called Basel rules and replacing them with a simple requirement for more bank capital—an equity-to-asset ratio of perhaps 15%.

This is much more important than any of the Wall Street Journal’s other recommendations in the article. I favor an equity requirement of 50%, implemented as a capital conservation buffer prohibiting firms with less equity and more leverage than from paying dividends, buying back stock or bailing out foreign subsidiaries under looser rules until the bank reachs that 50% equity to assets ratio. But a straight 15% would be a good start.