No Surprise: Basel Group Recommending More Bank Capital

The Basel Committee on Banking Supervision is considering requiring banks to hold more capital to protect against losses on complex financial products (see Bloomberg article). Banks that do not thoroughly investigate the types of risks they are taking with certain complex instruments would also be required to increase capital requirements. The reaction is not really a surprise. Of course, while such changes seem to make sense and be expected - after all, many banks were taking too much risk and were not properly capitalized - the worry of too much regulation must be considered, especially in an environment in which there are on-going efforts to help increase lending and unfreeze credit. Many are critical of the Basel II regulations, but the criticism is somewhat two sided, with those wanting either more or less regulation citing the ineffectiveness of the regulation for preventing the current crisis. Something in the middle, that considers better regulation and not necessarily more or less, will hopefully enter the discussion and help prevent any over-reaction in either direction. Either way, there is no doubt that the Basel regulations will present a moving target for US banks as they implement the standards, and will continue to put into question the earning power and valuation of such firms.