As I mentioned above, the expansion of sub-prime lending clearly imposed a negative externality on the whole economy, and so in hindsight regulatory measures that would have prevented such credit expansion could in fact have been beneficial. To summarise, capital requirements, and leverage ratios serve well to illustrate the trade-off between stability and growth I mentioned at the beginning.
The examples I provided earlier show that the costs incurred when an “oversized” financial system unwinds are very large and outweigh any pre-crisis gains. Therefore, prudent regulatory action to restore the balance between stability and growth is perfectly justified. 5.