Beyond that, regulators need to be sure that when financial turmoil does strike, big institutions are strong enough to survive without relying on government support. The crucial thing is equity capital — the money financial institutions get from investors willing to risk losses in return for a share of profits.
Earlier this year, the Fed issued a new rule requiring large bank holding companies to have $5 in capital for each $100 in assets. That’s more than the $3 international minimum, and the change was considered a great achievement. But that much capital still means that a mere 5 percent drop in the value of a bank’s investments could render it insolvent. Experience and research suggest that safety requires much more.
And that’s just traditional banking. In other areas of finance, the Fed and other regulators also have a lot more work to do. When markets are calm is a good time to press on. Next time they aren’t calm, it will be too late.