Global regulators say they're making progress in reducing the threat the world's largest banks can pose to the economy. In truth, their new rules may make things worse. Regulators want to create a second layer of protection against financial disaster, beyond the equity that comprises the banks' first line of defense against losses. It would consist of a special kind of long-term debt, issued by financial holding companies to investors willing and able to bear losses. The idea is that if a big bank came to the edge of insolvency, regulators could convert the debt into equity, using it to shore up myriad subsidiaries around the world without using taxpayer money. In principle, this is fine. In practice, it may not be.
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