On July 20, 2007, the much discussed slow-walk implementation of the Basel II framework was finally taking its form. The Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, and the Federal Reserve Board of Governors, all government agencies dealing in bank supervisory powers, issued a joint statement that day announcing an agreement had been struck “resolv[ing] major outstanding issues” that would “lead to finalization of a rule implementing the advanced approaches for computing large banks’ risk-based capital requirements.”

As the press released noted, the US adoption of Basel 2 would make it consistent with the international standards already adopted and active. Federal Reserve Chairman Ben Bernanke released a very short statement, saying “I’m pleased that Governor Kroszner and the policymakers representing the other banking agencies have reached a consensus, one that will pave the way for implementation of a modern, risk-sensitive capital standard to protect the safety and soundness of our large, complex, internationally active banks.” Comptroller of the Currency John Dugan was a little more direct.

Our current risk-based capital rules are simply inadequate in addressing the complex risks inherent in our largest institutions.

Presumably the new measures, which all the banks knew were coming, would be somewhat stricter on those large banks, and therefore make their business of complex banking somewhat more difficult. From the timing of the agreement plus the nature of it we can conclude only one thing – regulations caused the Panic of 2008. After all, July 20 was just a few short weeks before August 9, 2007, when wholesale banking as a seemingly dependable business model ceased to be that.

It’s an absurd proposition, of course, the logical fallacy post hoc ergo propter hoc. And in a very short course of time, Basel 2’s adoption was mostly forgotten. For one, just review what both Dugan and Bernanke said about it, which for Bernanke was in some ways worse than when he claimed earlier in 2007 that subprime was contained. Second, the problems and imbalances of that time were clearly far more than just capital ratios; banks had a great many other balance sheet problems (liquidity) to occupy them and their models to be worried about regulatory trivia.