There were few fireworks at the Group of 20 nations' finance ministers meeting that took place over the weekend in London. Their conference was, after all, a warm-up for the full summit taking place in Pittsburgh later this month. But they brushed aside their low billing, ignored populist demands for pay caps and made some useful headway, particularly on the need for banks to hold more capital.
During the past century, banks have held ever-less capital against their assets while investing in ever-less liquid products. This trend sharpened in the last decade as the sector strained to drive up its profitability. Globally, tangible common equity ratios fell from about 6 per cent in the mid-1990s to around 4 per cent in mid-2000s.
This left every individual bank less well defended against their own losses, but – more importantly – it increased systemic vulnerability exponentially. With every bank's immunity to losses weakened, contagions were more likely to break out. Deleveraging by one institution was more likely to provoke sell-offs elsewhere.