The international negotiations to hammer out broad, global rules for bank behavior are progressing, with countries scrapping over how to protect their pet styles of banking. You may have heard that Europeans prefer their large, "universal" banks to the kind of segmented system preferred by American reformers, but the debates, specifically around capital requirements, are even subtler:
The Germans and French want banks' minority investments in other institutions to count toward capital standards. The Japanese have raised concerns about no longer counting deferred tax assets as capital. U.S. officials want banks, such as Bank of America Corp. and J.P. Morgan Chase & Co., to continue to be allowed to count mortgage-securitization rights as capital.
This is why, to a certain extent, debating whether specific capital ratios belong in the financial-reform bill was always something of a canard: Even if the bill had specified, say, a 15 percent capital reserve requirement, regulators would need to decide what counts as capital. It's easy to imagine captured regulators taking that rule and allowing almost anything to be counted as capital (like, say, derivatives). On the other hand, giving regulators a general instruction for higher standards but forcing them to justify the standards through a transparent process could force more accountability on the system and create better-functioning rules -- or so supporters of the required-ratio approach hope.
Whatever rules were written into this bill, regulators were always going to set the facts on the ground -- Congress really isn't capable of getting into the weeds on what kinds of financial instruments should count for capital. More specificity makes for an easier-to-understand bill, but also brings with it some complacency. It's better to face up to the regulators' role and act to influence it than hope that simpler, clearer rules wouldn't be undermined.
-- Tim Fernholz
