Banks can make all the unsecured loans they want, so long as every dollar of them is covered by one dollar of excess capital.
That is, capital beyond regulatory minimums.
Secured lending, that is, a loan for which the current recoverable market value of the collateral (including all costs of foreclosure and resale) exceeds the loan balance is a fully secured note and is safe irrespective of the loan performance, as seizure and resale of the collateral will always result in no loss for the bank.
Enforcing this regulation of course requires that all assets be marked to their market every day. This sounds impossible, but it is not. You can mark at a frequency and excess cushion on asset valuation to preclude going into negative territory. Let the bank choose the frequency, but make clear that the penalty of going negative on unsecured loans .vs. excess capital is immediate seizure and shutdown of the institution. Period.
The above is the definition of "safe and sound" for any fractional reserve lending system. All the rest of this noise out of people like Bernanke, the OTS, OCC, the industry itself and Congress is just that - it is noise and a willful, knowing lie.
We are here in this mess because regulators refused to enforce this simple, one-sentence fundamental statement of safety and soundness in our banks.
As a direct consequence of this refusal we blew a huge asset bubble.
This was particularly inexcusable because we did it right on the back of a previous asset bubble that burst for the exact same reason.
No bank should ever be able to come to the taxpayer for a bailout,and if we enforce the single basic rule of fractional reserve safety and soundness none ever will need to be bailed out, because it will be closed and liquidated before it can pose systemic risk.
We the people must insist that Congress force these clowns to do their jobs. They know the mathematical facts behind this, and that is in fact the only safe and sound way to run a banking system.
They're refusing because they also know that the banks have not conformed to this, do not conform now, and have and will bribe Congress and others to prevent this standard from being imposed on them, instead sucking off the taxpayer teat.
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