Fixing the Banks

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Martin Wolf explains how he’d fix the banking system:

First, create a set of laws and institutions that make it possible to bankrupt any and all institutions, even in a crisis. Second, make financial institutions safer, with much higher capital requirements, against all activities. Third, prevent off-balance-sheet activities. Fourth, impose dynamic provisioning. Fifth, require huge cushions of contingent capital. Finally, cease to favour debt-finance, throughout the economy.

This is very sensible sounding: the first item is a backstop in case the others don’t work, and four of the remaining five items are aimed at reducing leverage throughout the banking system.  (Dynamic provisioning is the exception.  It might be a good idea, but it’s not directly related to reducing leverage.)  Now extend this to the rest of the financial system and make sure to write the rules with no wiggle room, and you’re done.  Piece of cake, really.  Any other problems you’d like solved?

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