To put it simply, the best way to avoid another TARP is for our large regulated institutions to have adequate capital buffers, reflecting the damage that would be done to the financial system were such institutions to fail. Implicitly, passage of Dodd-Frank was a criticism of the specific features of capital regulation that prevailed during the pre-crisis period.
Basel I capital requirements relied almost exclusively on capital ratios that were snapshots of balance sheets and thus frequently a lagging indicator of a bank s condition. The kind of capital that qualified for regulatory purposes was not uniformly reliable as a buffer against losses.