Banks make money by taking deposits and loaning them out at a higher rate - e.g. short term deposits to fund long term mortgages. Larger cash reserves may be said to reduce risk of default in a panic, but also reduce profitability against bigger banks and non-banks. Banks also have the opportunity to borrow from the Fed to cover a run on the banks, if their fundamentals are sound. Excessive government regulation will reduce profitability of banks against non-banks and bigger banks. As I learnt when doing my finance hw the idea that the government will prevent a stock market crash and financial panic from threatening banks is unrealistic. There are regulations on frauds (such as the mortgage backed security frauds that caused the 2008 financial meltdown). Confidence that government regulation will prevent a future banking meltdown is unrealistic. Experts need to access the need for keeping unproductive cash and reporting regulations if they substantially increase costs. In any case, every couple of decades it is likely that the government will need to bail out banks. The next stock market correction/crash will put pressure on banks and require the Fed and/or the Treasury to help them again. Regula...