Say you're the type of individual who likes to wager on sporting events. Say your total net worth is $100,000. Would you lay $3 million worth of bets at one time, even if you thought they were sure things?

In essence, that's what some of America's largest financial institutions were doing prior to the financial collapse of 2008. The big investment banks had at least $30 worth of assets (loans) outstanding for every dollar's worth of capital. Lehman Brothers, of sainted memory, had 40-1 leverage ratios because it was so deeply invested in risky mortgage derivatives. Fannie Mae and Freddie Mac, because everyone knew the government stood behind them, were at 100-to-1.

Now, three years after the fall, the United States government is trying to impose higher capital requirements on banks. Bankers, of course, hate this. The more times they can leverage every dollar, the more potential profit and the higher their bonuses. Banks make money by making deals, and money that is sitting in the vault is not making deals.

But federal regulators are moving to impose the so-called Basel III international standards that will require higher reserves and new liquidity standards. Depending on their mix of assets, in eight years, when the standards are fully phased in, banks will have to have roughly $1 in the vault for every $14 they have invested.

The too-big-to-fail banks — now called Systemically Important Financial Institutions, or SIFIs — would have an extra surcharge imposed, potentially as high as 3.5 percent. They'd have to have $1 in the bank for every $10 invested.

That would provide more cushion against financial shocks and less potential for future taxpayer bailouts. Wall Street is lobbying furiously against these higher ratios and finding some sympathy among Republican lawmakers.

House Financial Services Committee Chairman Spencer Bachus, R-Ala., argued that the capital requirements, along with the "tsunami of regulatory mandates" imposed by last year's financial regulation bill, might overly strain the U.S. financial industry.

We'd refer Mr. Bachus and others concerned with the future of free markets to a speech that Thomas Hoenig, president of the Kansas City Fed and a member of the Fed's Open Markets Committee, delivered Monday at New York University.

"I suggest that the problem with SIFIs is they are fundamentally inconsistent with capitalism," Hoenig said. "They are inherently destabilizing to global markets and detrimental to world growth. So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril."

Hoenig noted that America's five largest financial institutions today control more than half of the industry's assets, equal to almost 60 percent of GDP ($14.1 trillion). The largest 20 institutions control 80 percent of the industry's assets, which amounts to about 86 percent of GDP.

"Now," he said, "with their bailout costs amounting to billions of taxpayer dollars, SIFIs are larger than ever. Strikingly, they are arguing that they should not be held to stronger capital standards if the United States hopes to remain globally competitive. That assertion is nonsense."

Higher capital requirements are expected to slow economic growth slightly, but they will yield greater stability. It's a tough, but necessary, trade.

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