Leverage measures, which can zigzag with sudden inflows or outflows of deposits, should be viewed as a backstop to risk-based capital measures, not as a primary capital constraint.
Banks and regulators have proposed bail-in mechanisms for capital plans. Exposing creditors to losses could help protect taxpayers and depositors, but is long-term debt an adequate substitute for equity?
The FTC's move to hold payment processors responsible for the deeds of unscrupulous merchants could result in higher prices or less choices for small businesses and consumers.
More equity would enable banks to absorb more losses without becoming distressed or needing taxpayer support. Long-term debt is a poor substitute, particularly for the largest banks.
In the S&L crisis, regulators manipulated capital to prop up ailing thrifts. Today, regulators embrace risk-based requirements assuming they can correctly predict the future.
When the government backs any system, the beneficiaries have only limited interest in the risks they are taking. Senators Corker and Warner have fallen into this trap.
