Unintended consequences from "fixing" the US financial system Last year, I read the book The Bankers' New Clothes: What's Wrong with Banking and What to Do about It.  The book explained some of the causes of the recent financial crisis of 2007-2009 and gave some steps to prevent a similar crisis from occurring again.  Some of the steps were 


  1) eliminating the FDIC,
  2) increasing the capital requirements of banks (up to ~30% instead of the current 2%-3%), and
  3) having liability rest completely on bank owners and decision-makers within the bank (i.e. no government bailouts, depositors receive a certain number of cents on the dollar rather than 0, etc.).  


However, economics in plagued by the law of unintended consequences.  If these three points were implemented into the US financial system, what are some unintended consequences that could result?
1) Would lead to the return of general panic led bank runs, and introduce additional instability to the system. 

It´s not generally appreciated, that 19th century bank runs were not just a symptom of insolvency or illiquidity, but were also occasionally triggered by competitors (other banks) spreading rumours. Generally this is a bad idea that rests on the fallacy that banks are just another business.

2) They are typically rather more than 2-3%, 10-12% was the average at the crash, and Basel 3 is moving this up to above 15%. It´s generally a good idea, but it depends on the type of capital - more loss provisions are good, but simple holding extra share capital not so much. There are also side effects with respect to economic growth while the increase is occurring.

3) This seems a little confused. Depositors are not decision makers in banks - they are the customers. Owners, managers and shareholders of the banks are not necessarily the same people, but making in particular the managers and owners stand behind the banks with their entire assets might be interesting. As in ´may you live in interesting times´ interesting. Scottish banking in the 18th-19th century was regarded as more stable by the English since the entire property of the bank´s owners would be seized if the bank failed. In today´s world though, expect that to cause issues, if Banks are the only type of company that this kind of punitive ownership encumbers, then one might imagine that relatively few people will want to own one, or creative ways will be found around the requirement.

Banks are also usually regarded as a fairly safe investment (between major credit crises at least), and a good investment for pension funds and retirees, as their dividends provide a steady stream of income. Blowing those institutions up, might not be entirely desirable.

All of this not withstanding, the main issue with banks, and the answer to why they are not just another company - is that they provide the money supply. The problem posed by any banking crisis, and any proposed reform, is how does this avoid or solve monetary and credit supply contraction in the event of loan default failure. 1 &amp; 3) in particular would be likely to cause significant monetary contraction, and return the financial system to the instabilities of the 19th century, where not to put to fine a point on it, it was bouncing up and down like a yo-yo. Wikipedia has quite a nice list:

List of Banking Crises