“The most pressing task of reform must be to strongly limit the risks posed to the economy by large banks and other financial institutions that borrow so much. The best way to achieve this goal is to explicitly limit the extent to which they borrow to fund their operations. Rather than interfere with how banks operate, as does the Volcker Rule or proposals to break up large banks, such requirements restrict only the way banks finance themselves.
In their recent book, Anat Admati and Martin Hellwig convincingly make the case for much stronger and simpler borrowing limitations for banks. “Whatever else we do,” they write at the beginning of The Bankers’ New Clothes, “imposing significant restrictions on banks’ borrowing is a simple and highly cost-effective way to reduce risks to the economy without imposing any significant cost on society.” But they warn that the issue poses “a fundamental conflict between what is good for bankers privately and what is good for the broader economy.”