The document discusses how high leverage and low capital ratios of large US banks contributed to the 2000s financial crisis. It asks why banks might maintain capital ratios that are too low or leverage ratios that are too high in the absence of regulation. Banks have incentives to take on more risk and leverage because shareholders benefit from profits in good times, while risks are often socialized in bad times through government bailouts.

1. One of the causes of the financial crisis In the state 2000's was the high use of leverage and low
capital-ratios of large US banks. Why might banks, in the absence of regulation, maintain capital
ratios that are too low (or leverage ratios that are too high)?
Solution
Banks in the absence of regulations maintain capital ratios that are two low because-