Five years after the great financial meltdown, have the U.S. and other advanced economies done enough to head off the next calamity? The short answer is no.

There’s been frantic activity, all right. Heroic feats of legislation and rule-writing will keep regulators, compliance officers and analysts busy for years. But the gain in safety from all this is likely to be small -- too small, probably, even to offset the danger created since the crash by greater concentration in the finance industry. Once the residual fear from the last crisis fades and the appetite for risk revives, financial systems might be more at risk than before, not less.

The emerging framework of regulation is no great departure from the one that failed in 2008. There’ll be no reinvention of finance -- it will be business mostly as before, within slightly tighter (and far more complicated) bounds. Rethinking from first principles? Maybe next time.

The best part of the efforts to date is the plan to make banks increase their loss-absorbing capital. By guarding against the risk that relatively small losses might render a bank insolvent, extra capital makes the system safer. It also cuts the implicit subsidy enjoyed by banks deemed too big to fail.

Leverage Rule

Regulators are giving new weight to a so-called leverage rule. This requires maintaining a minimum amount of equity as a proportion of all assets -- rather than as a proportion of “risk-weighted” assets. Good. The failure of the risk-weighting approach contributed to the meltdown. It made banks look safer than they were and led to extensive regulatory arbitrage, as banks arranged their activities in complex ways to avoid the costs of complying.

Yet the new capital rules, when phased in, will still fall far short of what’s needed. The international Basel III agreement proposes a capital ratio of 7 percent of risk-weighted assets and a leverage ratio of just 3 percent. The U.S. intends to exceed these minimums -- for instance, by making the eight biggest banks observe a leverage ratio of 6 percent. That’s still too low.

Bear in mind that, historically, banks judged it necessary to finance as much as 25 percent of their lending with equity. Research suggests that a leverage ratio of 10 percent is the plausible safe minimum. U.S. banks are making big profits again, and could use them to keep adding to capital. The prospect of a 6 percent leverage ratio hasn’t hurt their value in the market. We should be discussing a doubling of that number -- but we aren’t.

More capital is one way to increase financial safety. Another is to lean against the size and complexity of modern financial institutions. That was the aim of the so-called Volcker rule, part of the Dodd-Frank reform, which aimed to break the link between proprietary trading (when banks place bets on their own behalf) and publicly insured deposits. Efforts to revive and recast the old Glass-Steagall separation between commercial and investment banking have the same idea.

It’s fun to argue about which of these approaches -- capital adequacy or a new Glass-Steagall -- is better, as though one must choose one or the other. There’s no reason in principle not to do both.

In practice, putting the Volcker rule into effect is proving difficult. A simple idea has become so complicated that nobody understands it. It’s also true that Glass-Steagall or something similar would not have kept Bear Stearns Cos. or Lehman Brothers Holdings Inc. out of trouble (they were pure investment banks); and it wouldn’t have kept Washington Mutual Inc. or Countrywide Financial Corp. out of trouble, either (they just made a lot of bad loans). Nonetheless, once the system is severely stressed, such segmentation can make it more robust.

Shock Absorber

Universal banks such as Citigroup Inc. are vulnerable to many kinds of risk. In normal conditions a financial conglomerate -- if adequately capitalized -- can use its diversification as a shock absorber. Yet the past five years have shown that in a crisis of confidence, big financial conglomerates amplify rather than absorb risk, worsen contagion and narrow down to nothing the choices available to governments.

The benefits of conglomeration for customers (as opposed to the executives in charge) are doubtful at best. If avoiding a repeat of the past five years matters, regulators should be trying to separate different lines of business, in some cases into entirely separate companies. The U.K.’s plan for “ring-fencing” moves a little in that direction. In the U.S., regulators aren’t planning anything so bold.

There’s a third issue, at least as important as the timidity of the proposals on capital and the failure to push finance back toward smaller, more segmented companies -- and it might have passed you by, because it’s much less discussed. The distinctive characteristic of the crash of 2008 was the part played by a new kind of run on financial systems. Depositors didn’t line up to get their money out of the banks. Banks and other financial institutions faced collapse because nondeposit funding -- money borrowed short-term on the capital market -- dried up. The breakdown was in wholesale not retail.

Daniel Tarullo, a governor of the Federal Reserve, has drawn attention to this. In a recent speech, he noted that “there is not yet a blueprint for addressing the basic vulnerabilities in short-term wholesale funding markets.” Well, it’s only been five years.

There’s been no political pressure to address this tough problem. Calls for bolder financial reform have come mostly from people who want to punish Wall Street and put bankers in jail -- an understandable sentiment, but also a distraction. Calls for more capital and a new Glass-Steagall fit the evil-banker template, so something, however inadequate, is happening. The challenge of regulating new kinds of wholesale money is a harder fit.

Yet that challenge matters at least as much. I’ll come back to it next time.

(Clive Crook is a Bloomberg View columnist.)

To contact the writer of this article: Clive Crook at

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