This is the Cato Daily Podcast for Wednesday, September 22nd, 2010.

I'm Caleb Brown. In attempting to prevent a future meltdown of the

financial sector, what should banks be required to do?

And if the solution to making banks less subject to dramatic market swings is more capital,

at what cost should banks be expected to hold this capital?

Peter Van Doren, Cato Institute Senior Fellow, and editor of Regulation magazine, comments

on how Basel 3 may influence the next financial crisis.

A long time ago, the people who owned banks,

often the rich white guys in the room,

if stuff went wrong, rich white guys in the room.

If stuff went wrong and their institution was threatened,

they were on the hook personally

to keep the institution going from their personal wealth.

And in some sense that was the buffer against an institution failing.

If they chose to do that, but in fact lots of times they didn't and then banks failed.

I mean bank failures have been a part of U.S. society since its inception and it was the only period in which we haven't had

lots and lots of bank failures is the post-FDIC era. of

a bank failures is the post-FDIC era in which at least for a period of 30, 40, 50 years, the government guaranteed deposit system seemed to suppress bank failure,

and we had a vigorous robust financial system as well and so it looked like to the outside observer from Mars that in fact we had solved a problem and through government policy and everything was fine, but everything in fact was not fine only we didn't know it.

So fast forward to Basel, that is a committee that provides standards for bank regulation, essentially.

It's an international consortium of advanced countries, the OECD countries that tried to form an agreement on so-called capital standards, what lay people can think of as the financial cushion

one should have in case bad stuff happens.

...