A preventive, stronger set of requirements in terms of levels and composition, with “sufficiently” broad scope, is necessary to generate responsible behavior in the financial system. In principle, more stringent capitalization requirements would induce shareholders of institutions to monitor more carefully the risk positions adopted by their managers.
Also, stricter liquidity standards would allow banks to handle stress situations associated with tightened funding sources and increased deposit withdrawals with more flexibility. Obviously, these restrictions may have an impact on the availability and price of credit. Yet, the increased social benefits are expected to surpass the costs.