Compare the banking landscape today with that of 10 years ago and it's hard to miss the changes. Lenders typically hold more capital and are much less reliant on unstable wholesale funding than they were before the crisis. Regulators are generally warier of mounting risks in the financial system - whether these come from consumer debt or derivatives exchanged over the counter.
Yet the right question to ask is not what's changed, but if these regulatory transformations have been sufficient. In at least three areas -- the right level of bank capital, the use of risk weights and structural reforms -- many economists fear the financial system remains exceedingly vulnerable to shocks.
The largest gap between academics and practitioners is probably on the level of capital. As Sir John Vickers, a professor of economics at Oxford who presided over Britain's Independent Banking Commission (IBC), noted in a recent speech, regulators are now accepting a level of leverage which is still around 25 or 30 times a bank's core capital. Many outside economists believe a bank should only hold assets worth six to 10 times their key funds, if not less. "So one group or the other, if not both, would appear to be wrong by a large margin, on a policy question of deep importance," Sir John noted.
