Bring Shadow Banking Into the Light
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The business of banking is inherently perilous. It turns short-term savings (such as customer deposits) into long-term investments (such as mortgages and corporate loans). This is risky: If too many savers want their money back at once, the bank can’t pay. It must either liquidate its assets or freeze its accounts, either of which can trigger a broader panic.
That’s why governments insure bank deposits and central banks stand ready to make emergency loans. In return for the insurance, banks are asked to follow certain rules. They face limits, for example, on how much they can lend for each dollar of equity their shareholders invest. The bigger the equity cushion, the less likely it is that taxpayers will have to bear losses.