Is the solution to undercapitalized European banks to lower capital requirements?

Irwin Stelzer has this warning in the WSJ. Personally, I would rather just let private standards govern these rules, but then you can't have the promise of government protecting everyone from default. Yet, there is a bit of an inconsistency in government policy weakening capital requirements when banks can't meet them.

Not only about Greece. Worry, too, about:
• the undercapitalized banks of Germany, with €23 billion in Greek debt on their books;
• the American municipalities that are seeing their interest rates rise in response to nervousness about the soundness of Dexia SA, the Belgian-French bank that backs municipal bonds but is exposed to Greek sovereign debt;
• the money funds in America that provide liquidity for European banks that have stacks of Greek debt on their balance sheets;
• the French banks, three major ones already threatened with ratings downgrades, that have €15 billion in Greek debt on their books;
• the exposure of world financial institutions to the almost-inevitable Portuguese and Irish defaults, with Spain and Italy possibly next in line.

But fear not. Germany, France, Austria, Luxembourg and Denmark have a solution. They are urging European Commissioner Michel Barnier to water down the Basel III Accord that increases capital requirements imposed on all banks. Their motto: "If all else fails, lower your standards."

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