One of the big holes in the financial regulation bill passed this summer was a rule forcing the banks to hold more capital. Although the legislation called for higher capital requirements, no number was set. Instead, it urged reliance on global regulators' conclusions. They are being worked out currently as part of the Basel III accords. Getting all nations to agree on universal rules, however, is proving to be challenging.
Damian Paletta from Wall Street Journal reports on the two major hurdles that remain. One is amount of capital and the other timing of implementation. The big problem is that some (especially European) banks complain that the higher capital levels that some countries like the U.S. are advocating are too high. They say that their banks don't need as much capital because they don't hold as many risky assets.
The idea that a bank's required capital should be proportional to the risk it takes makes sense. Indeed, it's been a central concept to how Basel has defined capital requirements in the past. But it creates a serious problem for regulators. How do you compute the amount of capital firms must hold based on the risk of their assets? Risk, by its nature, isn't always predictable.