WATCHING the world's regulators rewrite the rules of finance is a bit like supporting toddlers in an egg-and-spoon race. You want them to get to the finishing line but for every step forward there is a fumble, a squabble and lots of milling about. Yet bit by bit the main chapters of the financial rule-book are being written.

The most recent bit of progress was an agreement in Basel on June 25th to make the most important global banks hold an extra 1-2.5% of equity, the gold standard of capital. Some details of these rules still have to be thrashed out, including which banks will be named as systemically important financial institutions (SIFIs) on a global scale. Yet on capital, at least, the end of the race is now in sight. The agreement on a surcharge for the SIFIs comes on top of already-agreed “Basel 3” rules requiring all banks to raise their core-capital buffers to at least 7% of their risk-weighted assets.

The proposal has its critics. JPMorgan Chase argues that the minimum standards will make it hold 45% more capital than it did during the crisis, obviating the need for extra padding. In addition to capital, banks will also have to hold more liquid assets to safeguard against a funding freeze and reduce their reliance on fickle sources of financing. The cumulative impact on cost and risk is difficult to assess. “An enormous amount has already been done,” says the head of a big global bank. “We're now putting cherries on the icing on the marzipan on the cakes.”

Some worry about perverse consequences if SIFIs are assumed to be less likely to fail because they hold more capital, will be watched more closely and will have been officially certified as too important to go under. “You will have created an automatic list of preferred counterparties,” says one bank boss. That might enable the SIFIs to borrow more cheaply.

A related worry, reckons Davide Taliente of Oliver Wyman, a consulting firm, is that the current methodology of selecting SIFIs may not distinguish clearly enough between the chances of a bank going bust and the cost of cleaning up the mess if it does. For example, banks that are organised into discrete subsidiaries may be less costly to save than banks with more centralised structures because specific problems can be contained without necessarily affecting the whole group. This ought to be encouraged, yet it might also count against banks if they are less able to move capital easily between units to bolster bits that get into trouble.

A further worry is whether the rules will be implemented uniformly. Fierce lobbying is taking place, with several big banks, mainly in Asia but also a few in Europe, arguing that they should be left off the list of SIFIs or put on its lowest rung because their businesses are mainly focused on their home markets or are skewed towards supposedly safe businesses such as retail banking. American banks throw barbs at the way that Europeans calculate the riskiness of their assets, which affects the amount of capital they have to hold.

Worries that rivals will be handed an unfair advantage by uneven implementation go deeper than capital (see table). European banks now face stricter rules on pay than American ones, for example. The rules have the merit of aligning the interests of bank employees with shareholders but European banks say they are being outbid by rivals when they compete for employees in Asia in particular.

Resolution needed

Derivatives are another area of contention. America is putting the finishing touches to regulations that will force more of these instruments onto exchanges and into central clearing houses. Europe professes to be doing the same but more slowly, prompting concerns in America that business will flow to big European banks. “The Americans are right when they see the world dividing into a closed US market, and an open global business based in London,” says Simon Gleeson of Clifford Chance, a law firm. “But it was happening anyway.”

As the work of implementing many of these new rules moves to national regulators they should keep two risks in mind. The first is that differences in rules, both between countries and between different markets, will encourage risk to migrate to darker corners of the financial system. A second is that, having come this far, rule makers will put off the work of bank resolution. The real test of regulation is whether a big bank can fail without hurting taxpayers. That race has barely begun.