Matthew C Klein, Columnist

Why We Should Rip the Banks in Two

What banks do -- sell short-term debt (like deposits) to fund long-term loans -- is inherently risky.

March 15, 2013 at 2:52 PM UTC

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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What banks do -- sell short-term debt (like deposits) to fund long-term loans -- is inherently risky. In theory, shareholders bear this risk. In practice, much of it is dumped on citizens, even though they've no claim on the returns associated with the risk-taking.

The problem is that banks have too little capital to absorb losses without going bust. Even the new, stronger Basel III rules mandate a bare minimum ratio of bank equity to bank assets of just 3 percent. This means that a bank that loses more than 3 percent of its portfolio becomes insolvent.