There are as many explanations for the causes of the credit crunch as there are economists, but some themes predominate: excessive leverage; inadequate capital; over-complex financial instruments; an asset bubble; and (pretty universally) the asymmetric incentives that arose from bankers' bonus arrangements. Bankers were paid when the risks they took paid off, but were not penalised when their bets went sour. Since it can take years to be certain that bank risks are profits or losses, it proved too easy for them to take the cash on short-term gains but to have no responsibility for the consequences of their actions years later.
There has been a proliferation of plans to fix this structural weakness of the banking system. But politicians and regulators have overlooked a really simple solution. Why not design a limited-liability model, where bankers become personally liable for the cumulative amount of their bonuses?
Bankers who wish to receive a bonus above a threshold (say £50,000, or twice average earnings) would become personally liable for the amount of the bonus for a period, perhaps 10 years. They would sit between equity holders and other creditors of the bank - and so would be called upon should any bank find that its equity capital is wiped out by losses. In practice, this would mean their liability would be triggered by a government or other (private sector) rescue.