Simon Johnson makes an important qualifying argument regarding any level of bank capital requirements.
Given systemically important financial institutions and imperfect regulations, capital requirements have an important role to play. But we should be setting them with the understanding that banks fail before they run out of capital, capital is difficult to measure, and the errors all come out the same way—in the banks’ favor. In practice, of course, it’s all politics: even if Daniel Tarullo wants higher capital requirements, there’s a limit to what he can get through the Board of Governors, and there’s a limit to what Ben Bernanke thinks he can get while remaining an independent agency. That’s the bottom line to remember—not that our new capital requirements are the outcome of some reasoned discussion about how much capital banks really need to protect the rest of us from their misadventures.