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More than liquidity, the really powerful means in the regulatory toolbox is solvency and therefore capital, says Dimitris N. Chorafas in ‘ Risk Pricing: New approaches to de-risking financial products ' (www.visionbooksindia. com).
Underlining that solvency must be used to protect taxpayers, as well as to persuade banks to reform themselves, he adds that to do so in an able manner, the capital amount should correlate to assumed risk, measured objectively.
The author reminds that capital comes from savings and investments, not from the printing press of the Federal Reserve, the Bank of England or any other monetary institution, and notes that capitalism is promoted through entrepreneurship, and not by the Government's generosity.
He narrates how, since 2000, the global banking industry had a whole new trove of big risks through novel instruments, but lacked one basic ingredient, viz. real money. “As leveraging reached for the stars, first came the stock market crash of 2000, then the sub-primes, credit crunch, illiquidity, insolvency and deep recession of 2007-2009, which saw to it that capitalism was left without capital.”
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