banks would be obliged to contribute to a fund according to their risk structure and their systemic relevance. thus, just like the capital requirements under basel ii, a price would be placed on risk - taking, especially if it has a major impact on the system as a whole. however, in contrast to the capital held under basel ii, the resources that are contributed to the fund are lost to the individual banks. thus, the stabilisation fund puts an outright ( pigouvian ) tax on risk - taking in order to internalise the effects of risky activities on financial stability. as an ex post instrument to put a burden on the originators of the crisis, such a tax might be justified. nevertheless, as an ex ante steering tool, the proposed fund has major shortcomings. first, it would drain capital from banks. but, more importantly, it would not solve the moral hazard problem. as the fund would act as lender of next - to - last resort for failing banks ( the government would still have to step in if the fund ’ s resources were exhausted in a crisis ), the problem would merely be shifted from the level of government to the level of the fund. the banks, in fact, would still have an incentive to take on too much risk, while relying on the fund to cover potential losses. in the case of a european fund, the moral hazard problem might even be amplified, since costs that would normally occur at the national level could be shifted, at least partially, to the supranational level. a systemic crisis might even provoke a rat race among national governments for the fund ’ s limited resources. while the basel ii framework puts a shadow price on risk, and the stabilisation fund puts a tax on risk, a third proposal goes one step further. this proposal – a core element of what is known as the volcker rule – was proposed by president obama in mid - january. this rule aims at barring banks completely from certain forms of risk - taking : they would not be allowed to invest in or sponsor hedge funds or private equity funds. they would also be banned from engaging in proprietary trading operations for their own profit. thus, the risk of bank failures would be significantly reduced. at the same time, a cap would be put on the size of banks to reduce their systemic relevance. one shortcoming of the volcker rule, however, is that it most likely would not apply to investment vehicles, such as hedge funds or investment

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