Now here's a good idea: allow banks to use liquid, more volatile assets to shore up investments and customer deposits. European banking regulators are meeting today to suggest loosening the rules on what type of assets banks can hold as insurance against future collapses.
Right now, banks are barred from using certain assets such as mortgage-backed securities to shore up their assets against bank runs and rough economic patches. The loosening of regulations would allow those assets to be used. One of the reasons for this is because government-backed securities have dropped a lot in value over the past few years, forcing banks to take on more government debt or take a bailout to keep themselves solvent.
The problem, as I see it, is that banks are notorious for taking risks as it is, and giving them more freedom to do so may be bad. Take those mortgage-backed securities that screwed our economy here in the states. If bank investments are backed by something so flimsy and prone to devaluation, what could happen if there's a hiccup in the housing market or global economy?
We'll have to wait and see if the deregulation measures are going to go through and how banks respond when the leash is loosened. If they start lending like mad, it could be a boon to the economy, but it could also mean a lot of risk being hefted on the banks very quickly. Time will tell