Indeed, those were among the reasons a number of countries, including the US and Canada, had a leverage ratio regime ahead of the crisis.4 The Basel III leverage ratio, set at a minimum level of 3% Tier 1, is due to be implemented internationally by 2018. A second new element of the Basel III package was to augment solvency with liquidity-based standards. Banks’ liquidity has long been a pre-occupation of the Basel Committee (Goodhart (2011)). But it took wholesale liquidity runs on the world’s largest banks during the crisis to provide the impetus for internationally-agreed liquidity standards. Under Basel III, these take the form of a liquidity coverage ratio (LCR), designed to ensure banks have sufficient high-quality liquid assets to meet their 30-day liquidity needs; and a net stable funding ratio (NSFR), designed to ensure banks’ funding profiles are sustainable. The LCR has been implemented in full in most countries; the NFSR is due for implementation by 2018.5  During the crisis, a crucial missing ingredient from the financial regulatory architecture was found to be the ability to wind up financial institutions in an orderly fashion – that is, while minimising disruption to financial markets and the economy and without exposing tax-payers to risk (FSB (2014)). A number of measures have been taken or are in progress to fill this gap, including the introduction of more effective national resolution regimes for financial firms and greater cross-border co-operation and co-ordination when dealing with international banks in situations of stress (FSB (2017c)).
Of course, such a judgment depends on how much other policies succeed in reducing the negative externalities their failure would generate. Critics of our approach believe it would be better to just break up firms deemed TBTF now – perhaps through legislation requiring the separation of retail banking and capital markets activities or by imposing size restrictions that require firms to shrink dramatically from their current scale. My own view is that while this could yet prove necessary, it is premature to give up on the current approach: changing the incentives facing large and complex firms, forcing them to become more resilient, and making the financial system more robust to their failure. In my opinion, there are shortcomings to reimposing Glass-Steagall-type activity restrictions or strict size limits. With respect to Glass-Steagall, it is not obvious to me that the pairing of securities and banking businesses was an important causal element behind the crisis. In fact, independent investment banks were much more vulnerable during 2008 than the universal banking firms which conducted both banking and securities activities. More important is to address the well-known sources of instability in wholesale funding markets and give careful consideration to whether there should be a more robust lender of last resort regime for securities activities. With respect to size limitations, it is important to recognize that a new and much reduced size threshold could sacrifice socially useful economies of scale and scope benefits.