Before revision:  In particular, we propose an explanation for the current credit crisis, as a fundamental, systemic failure in the system of rules governing the behaviour of the reserve based banking system, which have resulted in the effective removal of central bank control over money and loan supply expansion. This situation has arisen from the presence of two 'bugs' in the underlying regulations controlling the banking system: securitized loans, which allow the sale of loans issued against fractional reserve controlled deposits to entities outside of the commercial banking system; and allowing debt instruments , in particular securitized loans to be part of bank equity capital reserves which are used for the purpose of regulating the total quantity of credit created by the banking system.
After revision:  In particular, we propose an explanation for the current credit crisis, as a fundamental, systemic failure in the system of rules governing the behaviour of the reserve based banking system, and in particular its internal controls on the supply of credit. We suggest that the current credit crisis is the result of multiple failures in the Basel regulatory framework, including the removal of central bank reserve requirements from some classes of deposit accounts within the banking system, allowing financial instruments representing debt to be used as regulatory capital, and in particular the introduction of securitized lending which effectively removed a previously implicit control over the total quantity of credit created by the banking system.