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If you think that big banks are dinosaurs, behold the asteroid that will soon bring about their extinction. It's called the Financial Stability Board and its chairman, Mark Carney, has set out proposals that would force the biggest to maintain a capital cushion as large as a quarter of the total balance sheet.

The FSB plan, which will be discussed at this week's G20 meeting in Australia, is intended to protect the world's taxpayers from a recurrence of the catastrophic costs of bailing out big banks that followed the 2008 crash. The so-called global systemically important financial institutions (SIFIs), banks such as Citi, HSBC and JP Morgan Chase, would have to hold between 16 and 20 per cent of their risk-weighted assets in equity funds or bonds easily convertible into funds that can be bailed into a bank rescue, thus avoiding the need for government funds. Add to that the existing cushions required under BIS rules and we may be talking about of a quarter of a bank's assets.

So, we applaud Mr. Carney, reckoning that it's about time someone forced the moneylenders to stand on their own two feet. For too long, the global Bank of Mammon has been sucking at the taxpayer teat. They have been abusing the implicit state guarantee. The promise that no bank will fail allows them to fund the extension of their lending activity into areas of high risk, offering unsustainably low rates to weak borrowers.

There lies the problem for the big banks. The natural consequence of forcing banks to hold more equity and more debt that behaves like equity, means that banking profits will shrink. Banks will earn less for their shareholders, because their ability to expand their businesses by borrowing in the capital markets will be curtailed. And bankers, too, will suffer because as profits dwindle, so must bonuses if the banks cut their cloth to the new fashion, as they surely must, if they are to maintain dividend payouts.

That's the bad news for graduate MBAs with Wall Street ambitions. Small wonder that a recent Deloitte report on graduate jobs pointed to a flight from banking to consumer product companies, suggesting that the smart graduates have already seen the future of banking and found it wanting. It must be bad news for bank investors but it may also be bad news, too, for clients of these titanic institutions. Customers will pay more for loans and services. If banks must finance their business with more expensive equity, their lending activity will become more expensive, too, and customers must pay the difference or these institutions will slowly go out of business.

It begs the question whether the traditional bank business model still makes sense. For those who like simplicity, one way of looking at a bank is to consider an inverted pyramid. The apex, touching the ground, is the shareholders' equity and reserves, representing, say, just 5 per cent of the total pyramid. Upon this slender foundation is built a great monument, representing the deposits of customers and money borrowed from other banks and the capital markets.

It's a daily balancing exercise to keep the pyramid upright, financing new lending with borrowing; hence the proposal from Mr. Carney that the equity be enlarged to make these financial colossi more stable. But for bank investors, this makes little sense because the logic of these financial conglomerates is leverage – using huge volumes of other people's money to make money. Banking leverage means that a mere 1-per-cent interest rate margin can represent a huge return of 20 per cent to an investor when the shareholder's funds are multiplied 20 times through borrowing.

If a bank cannot scale up its equity to rates of 19 to 1, it's no longer a great idea, it is no more a growth stock carrying an ever-rising dividend. It becomes a utility business with a lot of dead capital and with high operational gearing – all those expensive bankers with their claws scraping away at the shareholders' profits. At the same time, in the wider world, new kinds of lending are chipping away at the soft underbelly of banking. Crowdfunding, mutual companies and non-bank financial institutions are finding ways of matching borrowers to lenders that do not require the expensive balance sheet cushions demanded by the FSB.

It's a wonder that anyone is still interested in buying bank shares. Not least when you consider the complexity of a typical large banking institution. Consider Royal Bank of Canada; its third quarter financial statement runs to 89 pages, much of which is gobbledy-gook to anyone but the most financially erudite reader. It is astonishing that investment analysts reckon they can come to a considered view of the bank's prospects in just a few hours' study.

JP Morgan Chase and HSBC will still be here tomorrow as will Royal Bank of Canada. These institutions are not balloons that will easily be pricked by a regulatory dart. What Mr. Carney has done, however, is threatened to tether these strange, upside-down pyramids and to insist they are underpinned with solid-gold foundations. Clearly, this will be unsatisfactory to their shareholders and it is no solution to the funding needs of new and old businesses. These banks, too big to fail, will shrink, split up or just slowly disappear.

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