Evaluating Post-Crisis Banking Reforms
Following a major financial crisis triggered by the failure of several large, interconnected banks, policymakers propose two different regulatory reforms to prevent a recurrence.
- Reform A: Mandate that all large banks must fund a much larger portion of their operations with their own capital, significantly reducing their reliance on borrowed money.
- Reform B: Establish a new legal process that guarantees any losses from a future bank failure will be covered by the bank's shareholders and certain creditors, not by public funds.
Analyze how each of these reforms addresses the problem of banks taking on excessive risk due to the belief that they will be bailed out by the government. Then, evaluate which reform you believe is more fundamental in solving this problem and justify your reasoning.
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