By Tom Bradley

To me, the media coverage on the new banking regulations laid out by the Basel Committee on Banking Supervision misses the point (Basel was established in 1974 to improve the quality of banking supervision worldwide). The commentary has focused on the bankers’ lobbying efforts (“O, woe is me”), the impact on economic growth and how the new capital requirements will compare to where the banks are now.

The fact is, the banking system doesn’t have nearly enough capital. The new Basel limits, which raise the minimum level and tighten the qualifications for Tier 1 capital (a bank’s core capital made up mostly of common equity and retained earnings), still leave the banks highly levered. Tier 1 capital of 7% (the new minimum) is on the light side, especially given the damage a failed bank can do.

The new standards are important because the banks can’t be trusted to select the right amount of leverage. Despite operating in a 2% inflation world (or lower now), they’ve gotten used to earning 20% returns on their equity. The pressure to continue striving for that level of profitability, from industry peers, boards of directors and shareholders, will push banks to gear up their balance sheet as much as they can. The greed factor has not gone away.

The banks are whining about what the new rules will do to economic growth. In my view, they should keep their mouth shut and go back to basic banking. They have just been bailed out by the taxpayer and given 8 years to comply with new capital rules that are too lenient. They should accept this gift and get out of town.

Note: I am referring to the banks in the Global sense. The Canadian banks have obviously performed much better over the last three years and are much better capitalized than their U.S. and European counterparts.