To a large extent, the undue exposure to risk was possible because banks took much investment off their balance sheets. One possible source of weakness stems from capitalization and liquidity standards that were not effective enough to avert the crisis.
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.