Simple Rules for Financial Stability

This paper considers three simple rules-based strategies to improve and maintain financial stability. The first reforms the rules of bankruptcy to handle large financial institutions with a minimum of disruption. The second would focus macro-prudential policy on setting permanent and appropriate capital and subordinated debt ratios rather than discretionary countercyclical adjustments. The third would re-establish a rules-based monetary policy. Taken together these three reforms would constitute a sound overall strategy to improve financial and economic stability.