Must Financial Reform Await Another Crisis?

We have argued that if banks had much more equity, the financial system would be safer, healthier and less distorted. From society’s perspective, the benefits are large and the costs are hard to find; there are virtually no trade-offs.

The claim is often made, however, that this reform would be costly. Higher equity requirements, goes the argument, would reduce bank lending and harm the economy, which hasn’t yet recovered from the sharp downturn of 2008.