Quick: Who writes the rules to keep us safe from future financial crises? If you said Congress, you're only half right. There's another body that writes rules for the financial system, and it's just as important as Congress. But it gets much less attention.
The Basel Committee on Banking Supervision, made up of banking regulators from around the world, is in the midst of hammering out a new set of rules. They will decide, among other things, how much money banks have to hold in reserve as a cushion against losses. That's one of the most important factors that determines whether banks can withstand a crisis.
The meetings, held in Basel, Switzerland, are closed to the press. And none of the U.S. regulators who have attended would talk to me about what goes on there.
After making lots of phone calls to lots of potential sources, I eked out one detail about what it's like to be inside the rooms where the meetings are held.
"They're circular rooms, because it's in a tower," Barbara Matthews, a banking expert at a company called BCM, told me. "No windows."
Inside those windowless rooms, the regulators face a fundamental tension.
Making the banking system safer means making it harder for banks to lend money. That makes it harder for banks to earn big profits. It also makes everything from getting a mortgage to using a credit card slightly more expensive for consumers. And it makes it harder for businesses to expand, to hire people.
But it's clear which way things are heading.
"The overriding perception is the banks were too free with their money to begin with -- that's part of what helped get us into this mess," says Matthews, who used to work as a lobbyist for the banking industry. "And so the regulators from around the world are looking to make it harder for banks to lend."
Earlier this week, the Basel Committee came out with a report arguing that requiring banks to hold more money in reserve would improve economic growth in the long run, partly by avoiding long recessions.
The Institute for International Finance, Matthews' former employer, issued its own report in June, saying the proposed new Basel rules would result in lower economic growth and fewer new jobs.
"You have to think about regulation as an arms race," says Stephen Cecchetti, an economist at the Bank for International Settlements, home to the Basel Committee. "So every day, the banks wake up looking for a way around it. And the regulators and the supervisors look for a way to try to contain the next thing they do."
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