We have already identified the new rules and tools required for financial stability and should move on to prioritising our options. This was the implicit message in a speech given last night by Mervyn King, as he said we would need several options working together, and proposed a criterion by which to rank them:

The guiding principle of any change should be to ensure that the costs of maturity transformation – the costs of periodic financial crises – fall on those who enjoy the benefits of maturity transformation – the reduced cost of financial intermediation. All proposals should be evaluated by this simple criterion.

There are no silver bullets, says Mr King. Key suggestions – such as a permanent bank levy or limits on leverage – each add something, but are insufficient alone to prevent another crisis. Additional capital requirements, special resolution regimes and contingent capital also get a mention, underscoring the variety and breadth of proposed solutions.

More radical solutions – such as ‘limited purpose’ banking or functional separation – receive a more cautious treatment Read more