In response, some economists have proposed corner solutions to the systemic risk problem – in effect, radical structural redesign. Starting with Irving Fisher in the 1930s, some have proposed narrow banks with a 100% liquid asset ratio to protect the liquidity services banks provide. 26 Others have proposed mutual fund banks with a 100% equity ratio to safeguard banks’ solvency. 27 These limiting solutions are proof to risk incentives. The one guaranteed safe hiding place for the risk-fearing policymaker is the corner. One criticism of these proposals is that they might raise materially the cost of capital to banks and hence to the real economy. For example, 100% capital ratios could cause the economywide cost of capital to sky-rocket given the premium charged for equity over debt finance. This same argument is frequently heard in debates about more modest rises in banks’ capital ratios. But there are good counter-arguments that need also to be weighed. By lowering risk, higher levels of equity ought to lower banks’ cost of debt finance. Indeed, in a frictionless world Modigliani and Miller famously showed that this effect would fully offset the higher cost of equity, thereby leaving the total cost of capital for banks unchanged. 28 In other words, the cost of capital for a bank may be unaffected by its capital structure, at least when distortions in the economy are small. Even when they large, some offset in debt costs is likely.
Each of these intangible assets has value, but this value can be lost in a heartbeat. While it is true that a tangible asset such as a factory can burn to the ground overnight, intangibles, unlike a factory, usually cannot be insured. A challenge to current accounting - and disclosure - rules, therefore, is how to reflect accurately not only the value of intangible assets, but also their vulnerabilities to sharp downward revaluations. BIS Review 57/2002  5  In terms of complex financial transactions, this past year's events have made clear that accounting and disclosure rules have failed to keep pace with financial innovation. Complex financial arrangements, such as those funded offshore or through special-purpose entities, are not effectively addressed in today's accounting and disclosure rules. We also saw telecom equipment manufacturers run up billions of dollars’ worth of customer guarantees, which under current accounting and disclosure guidelines did not have to be recognized in financial accounts or disclosed to investors until their customers defaulted or were near default. In these cases, it seems clear, one of the basic tenets of accounting and disclosure rules - that there should be no “hidden” liabilities - seems to have been violated. I would like to see much more done to address these deficiencies without unduly burdening the readers of accounting statements. 4. Disclosure  Disclosure is most useful as a complement to accounting statements.