How to prevent America's next financial crisis

To prevent large financial firms from ever posing a threat to the economy, the Senate bill gives the government authority to impose stronger requirements on capital and liquidity. It limits banks from owning, investing, or sponsoring hedge funds, private equity funds or proprietary trading operations for their own profit unrelated to serving their customers. And it prevents excess concentration of liabilities in our financial system.

All of that means major global financial institutions — whether they look like Goldman Sachs, Citigroup or AIG — will be required to operate with less leverage and less risk-taking.

Crucially, if a major firm does mismanage itself into failure, the Senate bill gives the government the authority to wind down the firm with no exposure to the taxpayer. No more bailouts. Instead, we will have a bankruptcy-like regime where equityholders will be wiped out and the assets will be sold.

These are important steps, but they are not enough. Ending “too big to fail” also requires building stronger shock absorbers throughout the system so it can better withstand the next financial storm. To do that, the Senate bill closes loopholes and opportunities for arbitrage, and it brings key markets, such as those for derivatives, out of the shadows.