How can we make banking safe? A head of steam has been building behind the idea of restructuring banks so that their retail arms are cushioned from riskier activities, and can be plucked neatly from the clammy grasp of any future floundering bank. That is sensible – if easier said than done.
But why leave it there? The simplest way to reduce the risk of a future banking crisis is to force banks to hold more equity.
More equity makes banks safer, other things being equal, because the shareholders who provide the equity have no claim to being paid any particular sum of money. They simply get whatever is left after the bank takes its profits and its losses. That flexibility is what provides room for mistakes – essential in any complex system.
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