The commentary Analysis: No let up in G20 reforms after Basel agreed by Huw Jones from Reuters is an encouraging sign.

A deal on bank capital rules won’t see world leaders take their foot off the reform pedal but will instead clear the decks for them to focus more squarely on an even harder issue — tackling too-big-to-fail banks.

One of the excuses that was used to justify deregulation in the United States was the need for U.S. banks to compete with foreign banks that did not have to live with the same type of regulations we had here.  (Of course not enough people here asked, “If the other banks are allowed to do crazy and dangerous actions, why would we want to be like them and let our banks do the same?”)

However, considering how foolish we were to emulate the others’ folly, it helps if the others end their folly along with us.

“The Basel Committee and the FSB [Financial Stability Board] are developing a well-integrated approach to systematically important financial institutions which could include combinations of capital surcharges, contingent capital and bail-in debt,” the two bodies said in their statement on Sunday.

The other thing to remember is that tough regulation is not only about punishing the guilty.  It is also about preventing the crooks from having an unfair advantage over the law abiding.  When the crooks have an unfair advantage, their are two unhappy free market responses.  Either the business’s run by ethical people are driven out of business because they cannot compete against the unfair advantage, or the ones with only weak ethics are driven to follow the practices of the totally unethical so they can save their businesses.  This should not be the kind of situation we want to allow or encourage.

How do I know the market will react this way?  I first observed this during the dot com bubble when I was a mutual fund investor.  There were mutual fund managers who were managing funds that were growing by 90% a year by investing in companies in the bubble.  These managers were getting huge financial bonuses and their mutual funds were growing larger.

The prudent managers who could not match this impossible performance were drummed out of the business and their mutual funds shrank in size.  It is a miracle that their were any prudent managers left to pick up the pieces after the bubble burst and those other risky funds collapsed.

I always told my friends who were taking chances, “It is not how much money you make on paper, it is how much money you get to keep in the long run.”