First, raise capital requirements... Leverage ratios of 30 to one are crazy. Three to one looks far more sensible.
Second, institutions must also have substantial liabilities that can be converted into equity or treated just as if they were equity, in a bankruptcy procedure...
Third, make capital requirements powerfully counter-cyclical.
Fourth, make sure that banks hold a large stock of assets that are easy to value by lenders of last resort.
Fifth, shift incentives within firms. The managers should receive bonuses in shares they cannot sell until years after they have left . . .
Sixth, impose much higher capital and collateral requirements against trading in derivatives. All such activities should be moved on to exchanges. Yes, innovation would be slowed. When the costs of innovation are borne by others, that is good sense.
Seventh, radically improve the quality of information available. Particularly important is a change in payment of rating agencies. Since these provide a public good, they must be funded by a general levy.
It's desperately important that Britain's new government takes a lead on implementing these. We're all in mortal financial danger until they're in place.
H/t Thomas PM Barnett.