Not sure if this had been posted already but the whole speech is very lucid and highly recommended (pdf):
“Banking: From Bagehot to Basel, and Back Again”
The Second Bagehot Lecture
Buttonwood Gathering, New York City
The text beyond page 16 is simply shocking (excerpt):
"…All of these potential reforms would be steps in the right direction. They would all help
to put more of the costs of maturity mismatch on the shoulders of those who reap the
benefits. But taxes, the Basel capital requirements, special arrangements for systemically
important financial institutions and enhanced resolution procedures all have drawbacks
and are unlikely to do the job perfectly. So, if we cannot rely solely on these types of
measures, are there more fundamental directions in which we could move that would
align costs and benefits more effectively?
One simple solution, advocated by my colleague David Miles, would be to move to very
much higher levels of capital requirements – several orders of magnitude higher. A
related proposal is to ensure there are large amounts of contingent capital in a bank’s
liability structure. Much more loss-absorbing capital – actual or contingent – can
substantially reduce the size of costs that might be borne outside of a financial firm. But
unless complete, capital requirements will never be able to guarantee that costs will not
spill over elsewhere. This leads to the limiting case of proposals such as Professor
Kotlikoff’s idea to introduce what he calls “limited purpose banking” (Kotlikoff, 2010).
That would ensure that each pool of investments made by a bank is turned into a mutual
fund with no maturity mismatch. There is no possibility of alchemy. It is an idea worthy
of further study…"
“Banking: From Bagehot to Basel, and Back Again”
The Second Bagehot Lecture
Buttonwood Gathering, New York City