There is a literature on how best to regulate systems in the face of such Knightian uncertainty. It suggests some guideposts for regulation of financial systems. First, keep it simple. Complex control of a complex system is a recipe for confusion at best, catastrophe at worst. Complex control adds, not subtracts, from the Knightian uncertainty problem. The US constitution is four pages long. The recently-tabled Dodd Bill on US financial sector reform is 1,336 pages long. Which do you imagine will have the more lasting impact on behaviour?

Second, faced with uncertainty, the best approach is often to choose a strategy which avoids the extreme tails of the distribution. Technically, economists call this a “minimax” strategy – minimising the likelihood of the worst outcome. Paranoia can sometimes be an optimal strategy….

Third, simple, loss-minimising strategies are often best achieved through what economists call “mechanism design” and what non-economists call “structural reform”. In essence, this means acting on the underlying organisational form of the system, rather than through the participants operating within it. In the words of economist John Kay, it is about regulating structure not behaviour…

I personally sympathize with simpler controls for the banking industry.

The committee had already agreed to a soft phase-in for its net stable funding ratio, which covers a bank's longer-term liquidity. That measure will be tested from 2012 and become mandatory in January 2018.

On Tuesday the committee said it would also have a softer phase-in for its liquidity coverage ratio (LCR), which will require a bank to hold enough highly liquid assets, mainly government bonds, to cover 30 days of net cash outflows.

The LCR observation period will start next year but the committee still wants the rule to become a minimum global standard in January 2015.

One unintended consequence of the current round of reform could come to the banks’ rescue. Banks have long argued against punitive capital requirements on the basis that they will restrict their ability to lend.

One likely, but little discussed, consequence of higher capital requirements is that companies will turn to the capital markets for their financing needs. In other words, the reforms will disintermediate lending banks. Investment banks that can help clients raise money on the capital markets should benefit.

We have seen this before. After the banking crises of the 1980s and early 1990s, the markets saw an explosion in new forms of capital raising as banks in the US, Europe and Japan were forced to rein in their lending. This is reflected in data kindly crunched for Financial News by Citigroup: bond issuance overtook net loan issuance in the second half of 1990 and has never looked back.

The Swiss, fearing their economy could collapse under the failure of one of their large banks, have roughly doubled up capital requirements for UBS and Credit Suisse, asking each bank to hold some 75 billion Swiss francs in capital, in common equity and new financial instruments called contingent convertible bonds. Read our coverage here.

The strict rules, known as “Swiss finish” to the new Basel III banking rules, are, however, less stringent than many investors and analysts had feared, because the amount of common equity to be held by the two banks is only slightly higher than prescribed under the international rules.

Instead of holding 7% in common equity against risk-weighted assets, UBS and Credit Suisse will have to own 10% of common equity, something which both banks are expected to attain shortly after the new measures are expected to come into effect in 2013.

Tougher rules for bigger banks: Here's the start.

Financial Stability Board Chairman Mario Draghi renewed calls for capital rules for the largest lenders that go beyond the Basel III proposals earlier this month from global regulators.

Draghi said in Paris today that systemically important financial institutions should have the ability to absorb more losses than smaller banks. Draghi, who is also governor of the Bank of Italy, made similar comments in newspapers in the U.K. and his home country earlier this month.

...Adair Turner, the chairman of the U.K. financial regulator, last week also said he would have set higher capital requirements for systemically important banks.

The regulators and central bankers at the FSB are studying what types of extra capital beyond the Basel III requirements could be sought for the largest lenders, including capital surcharges, contingent capital such as convertible bonds, or “bailed-in assets.”

“The FSB and the Basel committee have been very clear about this issue -- there will be some sort of additional capital requirement coming for the biggest banks soon,” said Barbara Matthews, managing director of BCM International Regulatory Analytics LLC in Washington. “Big banks should be worried, and are already worried, because the combination of all these new rules will have a great impact on their business models and profitability.”