The Federal Reserve is mulling a new set of tougher banking rules to boost the odds that the financial system will remain sufficiently liquid when the next crisis strikes. It’s a worthy goal, if only because one day another event will surely arrive. But all the usual caveats apply when it comes to engineering outcomes in economics, starting with the sober reality that any efforts to sidestep implosion due to banking turbulence are forever linked with the potential for blowback by way of moral hazard. In fact, there can be no permanent solution for managing bank risk if the goal is simultaneously keeping the threat of bank runs to a minimum while maximizing prudence in matters of investing and lending in the private sector. The ideal regulatory prescription that promotes each of these two competing interests is in constant flux due to the ebb and flow of the business cycle.
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