Incentive-Robust Financial Reform

Despite the various reforms of prudential banking regulation from 1989 to 2002, and the substantial addition of new prudential regulations during that period, there were three key policy errors, all of which had been at the core of the banking disasters of the 1980s, which returned with a vengeance in the 2000s: (1) the government subsidization of risk in mortgage finance, (2) the failure to measure in a timely and forward-looking manner the extent of risk taken by banks and require capital commensurate with that risk, and (3) the implicit protection enjoyed by “too-big-to-fail” financial institutions