Core, mantle, and industry: a monetary perspective of banks' capital standard

Hicks’s analysis of the Classical Model and of the General Theory omitted two key variables, credit risk and the capital of the banking system, in explaining the interaction between industry and finance, and hence the relationship between monetary impulses and macroeconomic activity. This essay is structured as follows. First, a brief overview of Hicks’s interpretation of Keynes’s approach is offered. In the next section attention is drawn to the missing link (banks’ capital under conditions of credit distress). In doing so, retrospectively, models are used that are now well accepted, but that were already highly relevant throughout a period when banks were enterprises privately owned and facing default. Finally, the possible lessons of monetary history in evaluating the implications for banking and economic stability of the new international capital standards for banks are explored.