Quoting the Crisis

Precisely because of the potential threat they pose to the broader financial system, systemically significant institutions should face enhanced prudential regulation to limit excessive risk-taking and help ensure their safety. Such regulation might include relatively stringent capital and liquidity requirements, most likely on a counter-cyclical basis (to limit excessive lending in boom markets and the need for fire sales in down markets); a maximum leverage ratio (on the whole institution and potentially also on individual subsidiaries); well-defined limits on contingent liabilities and off-balance-sheet activity; and perhaps also caps on the proportion of short-term debt on the institution’s balance sheet. 

However implemented, an important advantage of the proposed system is that it would provide financial institutions with a strong incentive to avoid becoming systemically significant. This is exactly the opposite of the existing situation, where financial institutions have a strong incentive to become “too big to fail,” precisely in order to exploit a free implicit guarantee from the federal government. This unhealthy state of affairs can be corrected by being clear about the systemic nature of financial institutions and regulating them appropriately, rather than waiting until they are already in trouble to act.