The most important thing lawmakers could do to reform our financial system is impose tough rules limiting the debt and risky investments that banks and other financial institutions can pile up.
Normally, setting capital standards should be up to regulators, just as setting short-term interest rates is up to the Federal Reserve. But the financial industry, especially in good times, will always press for relaxed standards. So in the case of how deeply indebted an institution can become, it’s time that a cap be written in the law.
Canada caps leverage for financial institutions at 20-to-1, meaning for every $20 invested or lent, $1 must be set aside. It’s no accident that Canada came through the economic crisis in much better shape than U.S. markets.
By comparison, Wall Street banks such as Bear Stearns and Lehman were operating with ratios of 30-to-1 or greater.
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