The latest Basel Committee on Banking Supervision's current capital standards requires that banks at least triple the amount of capital they have in their holdings. Though the leaders of the Group 20 nations agreed to endorse new requirements by Basel in November, the UK's Independent Commission on Banking stated that a majority of the respondents to its consultation paper viewed the new regulations, referred to as Basel III, as being "insufficient".

A recent published paper by a MPC member has suggested that the capital ratios be increased above the Basel III requirements as a higher security against the financial banking crisis of 2008 and 2009 that required taxpayer bailouts of many major banks. The recent paper was authored by the Bank of England's Monetary Policy Committee member and former finance professor David Miles along with economists Jing Yang and Gilberto Marcheggiano. It was noted that the published paper represented only the views of the authors and not those of the Bank of England or the Monetary Policy Committee.

The paper was put on their website http://www.bankofengland.co.uk entitled "Optimal Bank Capital". The paper states that governments and regulators must change their standard thinking that equity capital is too costly to keep at higher levels but is in fact necessary.

The published paper stated: "We believe the results reported here show that there is a need to break out of the way of thinking that leads to the 'equity is scarce and expensive' conclusion. That would help us get to a situation where it will be normal to have banks finance a much higher proportion of their lending with equity than had been assumed in recent decades to be acceptable."

As banks build up their capital ratios there would be a small impact on the costs of borrowing money. The banks will shift costs over to the borrower as they attempt to build up reserves. It also will keep lending constrained. Constraints have already had an impact on both new mortgage and remortgage lending. It is estimated by the authors of the paper that the average cost of funding a higher capital ratio would go up approximately 10 basis points to 40.

"Even proportionally large increases in bank capital are likely to result in a small long-run impact on the borrowing costs faced by bank customers," the authors said. "The amount of equity funding that is likely to be desirable for banks to use is very much larger than banks have had in recent years and higher than targets agreed under the Basel III framework."