What Counts? An Update on the Debate Concerning Regulatory Capital

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Background to the regulatory capital initiatives

Since the outbreak of the subprime crisis in mid-2007, the world’s financial markets have suffered unprecedented turmoil. Many banks, even large institutions which had previously been considered icons of stability, failed or had to be rescued or nationalised by their governments. The financial crisis has prompted regulators in the U.S. and Europe to re-examine how much capital is enough capital for banks. Regulators generally agree that banks were too highly leveraged and that, in the future, banks should be required to have more capital. Policymakers also agree that there should be greater “uniformity” across jurisdictions as to bank regulatory capital requirements and as to the treatment accorded to specific financial instruments. Regulators and commentators posit that if regulatory capital standards and product definitions are harmonised, there will be fewer opportunities for “arbitrage” by banks. That’s about as far as regulators have gotten in terms of coming to a common understanding......

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