The Financial Times reports that a study conducted by Bank of England researchers finds that the current level of risk-weighted capital held by banks (about 7 percent) is woefully inadequate to protect against future financial crises. Calibrating their model with data from 1821-2001, the authors find that an astounding 53 percent capital to risk-weighted assets would have been required to insure complete stability during the 180 year period and 15-20 percent would be sufficient under more plausible assumptions.
The FT laments that the study “…gives no suggestions on how to get” to the appropriate level of capital.
Which brings me back to double liability, uncalled capital, or some other form of contingent liability. These are not panaceas, but they–or something like them–are our best bet for bringing us closer to an era of bank soundness and stability.