The problem isn’t with private banks, it’s with private HUGE banks. If the 20 largest banks in this country had entered this crisis with 2.5x the capital they did (or, conversely, 2.5x less leverage), a lot of the current problems would be alleviated because the losses could be sucked up by capital.
The largest US banks – those deemed too big to fail by our government – should carry dramatically more capital and should be operated not unlike large, boring public utilities. That’s the price you pay for operating in a regulated, ultimately taxpayer-backstopped industry.
The only changes I’d make to the smaller banks (less than $25 billion in assets) would be to cap concentrations in certain loan types. For example, no bank can have more than 10% of its loan portfolio in construction and development. Had we made that one single change five years back, we’d see a small fraction of the failures we’re going to see.
Personally I don’t see any reason to destroy an otherwise sound system when a few small (but critically important) regulatory changes could’ve mitigated much of this disaster.
