The whole subject of international banking regulation, and in particular the topic of capital standards for large banks, may seem a bit untimely just now, what with Europe’s banks at the brink of collapse — even though regulators declared them amply capitalized just weeks ago. Given that recent history, it’s tempting to write off the debate over capital standards as not only eye-glazing but fundamentally irrelevant.

But manipulable and difficult to enforce as they may be, capital standards are one of the best regulatory tools for promoting financial stability, because holding substantial capital is one of the few things banks can do that actually helps them withstand panics. Regulators can, and should, design deposit insurance schemes and resolution mechanisms to deal with bank failures; a firm capital base, though, protects banks from failing in the first place.

Read the full story here.