The market feared much higher levels than 7%, thus leading to this morning's rally. But, put another way, 7% capital requirements really mean that for every $1 in deposits, banks can make $14.29 in loans -- eight years from now.
Perhaps the Basel Committee thought 20:1 leverage -- when banks were asked to set aside only 5% of their capital on loans -- was perfectly acceptable and now 14:1 is severely conservative. Maybe when you compare it with the 25:1 ratio carried by Goldman Sachs (GS - commentary -Trade Now) or the 32:1 ratio carried by Morgan Stanley (MS - commentary - Trade Now) back in 2007, these new standards seem austere.
Yet the Canadian banks such as Royal Bank(RY - commentary - Trade Now), Bank of Nova Scotia (BNS - commentary - Trade Now), Bank of Montreal (BMO - commentary - Trade Now) and Canadian Imperial Bank of Commerce(CM - commentary - Trade Now) have current leverage ratios (and did through the crisis) of 21x, 23x, 19x, and 29x respectively. Yes, you read that last one correctly: Canadian Imperial Bank of Commerce has a current leverage ratio of 29:1.
I thought the Canadian banks were the ones we were supposed to emulate. I thought they were smart. I thought they were conservative. They had a single regulator who was on the job. Even men's magazines are writing articles declaring these obvious facts, so it must be true.