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Jamie Dimon, the chief executive of JPMorgan Chase

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[JPM  Loading...      ()   ], condemned new international capital regulations as "anti-American" today.

We're so accustomed to reading the statements of banking executives with cynical eyes that it would be easy to miss the point that this time it is different. Dimon is right.

If anything, his criticisms of the direction of the international regulations, known as Basel III, don't go far enough.

To be sure, Dimon was not condemning the idea of international accords altogether.

The focus of his criticism, which emerged in an interview with the Financial Times, seems to be the privileged position of a form of structured debt called "covered bonds"

Covered bonds are an important part of the capital structure for European banks but are much less widely owned or issued in the United States. Since Basel III restricts how banks operate and finance themselves, giving an advantage to covered bonds will give an advantage to European banks that already own the bonds.

Covered bonds differ from both senior bonds issued by banks and from mortgage-backed securities. They are issued by a financial institution and backed by a group of loans, just like mortgage-backed securities , but the underlying loans continue to reside on the balance sheet of the banks. Bond investors have access to both the on-balance sheet pool of assets—which, very, often, are mortgages—and get a general claim against the issuer that ranks alongside its senior unsecured creditors.

Traditionally, covered bonds have been regarded as having low risk because of this dual-recourse structure. If the bank that issued the bonds runs into trouble, the investors have both whatever value is in the mortgages and stand at the front of the line in a bankruptcy.

And investors have traditonally viewed covered bonds as very safe investments, requiring very, very little premiums above the "risk-free" rate of US Treasuries .

But covered bonds are turning out to be not as risk-free as thought.

"In hindsight, this view of covered bonds could be seen as non-commensurate with the actual credit, refinancing and liquidity risks inherent in covered bonds. These risks have revealed themselves in recent episodes of market stress as the credit strength of issuing entities and the quality of cover pool collateral were questioned," Pimco recently explained.

The Basel III rules grant two special privileges to covered bonds.

First, they are the only privately labeled structured security can be used to meet the liquidity buffer requirements. Otherwise, only cash or government securities can be used to meet these requirements.

Second, the Europeans are proposing a "bail-in" provision that would exempt covered bond investors from participating in burden-sharing in the event of a bankruptcy.

This privileged status creates systemic risk of its very own. It is likely to cause a surge in demand for the bonds, as financial institutions load up on them to meet the new requirements. This means that the bond prices will reflect an increased demand driven by regulatory structure rather than fundamental credit, liquidity or interest rate risk.

This should make anyone who recalls the privileged status of mortgage-backed securities and sovereign debt nervous. One of the key reasons US banks held so many mortgage-backed securities was the structure of the regulations. The same with European banks and Eurozone sovereign debt.

Regulations that homogenize investor behavior around the regulators' view of risk make the financial system more fragile—not less. They make the system more vulnerable to unexpected shocks, to "Black Swans."

Dimon is right to raise the alarm about covered bonds. Let's hope we haven't grown too cynical to listen.

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