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You make a good point, but it implies that there are two core elements of banking; evaluating risk, and maturity transformation. Plainly, the big banks failed

You make a good point, but it implies that there are two core elements of banking; evaluating risk, and maturity transformation. Plainly, the big banks failed at having a 'global view of risk', to the point that governments bailed them out during the global financial crisis (GFC). What is different about the current situation? And why support a business that cannot honor its most basic function? As for maturity transformation, perhaps there is a kind of 'paradox of thrift', where individually (or as a single large bank), size is of benefit, but global pools of financial assets and risk lead to crises, again evidenced empirically by the GFC. Perhaps having banks no bigger than, say, 1%-5% of global financial assets would be a useful middle ground.

lmm 11y ago
There's a fundamental tension between mark-to-market capital requirements and the basic functions of banking. I've heard it argued that Lehman would still be in business if they hadn't been required to mark-to-market - that it wasn't their global view of risk that failed, but a panic in the market that sparked a (in some sense irrational) sell-off. And a big reason for AIG's involvement was differences in risk-modelling requirements between banking and insurance. Of course at the same time the reason for those requirements is to prevent a bigger bailout further down the line - like any risky business, we give them a certain amount of rope, but eventually call everything in. There's no easy answer. The traditional line is that governments should act as a lender of last resort, but charge a penalty rate when doing so, which sounds reasonable to me.