Resolution would naturally go hand-inhand with a greater reliance on instruments such as contingent capital. And there would be enormous challenges in resolving global banks that span countries with different legal jurisdictions. Extending resolution procedures to large institutions is a necessary but not sufficient condition for stability of the banking system. 7. More radical reforms  All of these potential reforms would be steps in the right direction. They would all help to put more of the costs of maturity mismatch on the shoulders of those who reap the benefits. But taxes, the Basel capital requirements, special arrangements for systemically important financial institutions and enhanced resolution procedures all have drawbacks and are unlikely to do the job perfectly. So, if we cannot rely solely on these types of measures, are there more fundamental directions in which we could move that would align costs and benefits more effectively? One simple solution, advocated by my colleague David Miles, would be to move to very much higher levels of capital requirements – several orders of magnitude higher. A related proposal is to ensure there are large amounts of contingent capital in a bank’s liability structure. Much more loss-absorbing capital – actual or contingent – can substantially reduce the size of costs that might be borne outside of a financial firm. But unless complete, capital requirements will never be able to guarantee that costs will not spill over elsewhere.
Second, although many of these positions net out when the financial system is seen as a whole, gross balance sheets are not restricted by the scale of the real economy and so banks were able to expand at a remarkable pace. So when the crisis began in 2007, uncertainty about where losses would ultimately fall led confidence in banks to seep away. This was obvious through the crisis. Almost no institution was immune from suspicion, the result of the knock-on consequences so eloquently described by Bagehot when he wrote: “At first, incipient panic amounts to a kind of vague conversation: Is A. B. as good as he used to be? Has not C. D. lost money? and a thousand such questions. A hundred people are talked about, and a thousand think, “Am I talked about, or am I not?” “Is my credit as good as it used to be, or is it less?” And every day, as a panic grows, this floating suspicion becomes both more intense and more diffused; it attacks more persons; and attacks them all more virulently than at first. All men of experience, therefore, try to “strengthen themselves,” as it is called, in the early stage of a panic; they borrow money while they can; they come to their banker and offer bills for discount, which commonly they would not have offered for days or  2  BIS Review 140/2010  weeks to come.