The Institute of Economic Affairs, in a report published on Tuesday, said banks should be allowed to decide themselves how much capital they need to hold instead of being told by regulators.
The IEA said the whole system of capital regulation should be dropped and attention focused on making it easier for banks to fail.
“Once they are forced by the possibility of failure to take responsibility for their actions, banks are best placed to judge their own capital requirements,” said the IEA.
The IEA said the idea of regulators determining how much capital banks needed was flawed and recommended a return to 19th century banking model whereby lenders would be free to determine their capital levels for themselves.
“We would go back to the years of banks choosing their own capital ratios: the system which produced stability in British banking for more than a century. It will be a system where there is stability not stasis,” said the IEA.
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