Like the unseen rule-master in the British television show Big Brother, the Basel Accord encourages infantile behaviour among its charges. Within the confines of the system, rational, intelligent adults are transformed into pouting, tantrum-throwing, devious children.
Banks have spent the time they have been locked away in the unreal world of Basel devising all manner of time-consuming and ultimately pointless games. They have, for example, created hybrid tier one capital securities, a form of capital that obeys the letter of the Basel rules but flouts their spirit.
On the asset side of the balance sheet, the subterfuge has been even greater. Banks have transferred hundreds of billions of dollars of their best assets to the capital markets through collateralized loan obligations while hanging on to the most poisonous stuff. They know this is illogical. But the paternalism of Basel creates a culture of rule-bending and discourages good risk management.
Outside, in the real world, there are other financial services corporations - the insurance companies - that wouldn't stand for any of this sort of nonsense. Their true regulators are the rating agencies and the equity markets. A small player such as recent UK bankrupt Independent Insurance may sail too close to the wind and come to grief.