The depth and scale of the financial crisis prompted a strong response from regulators. Basel III raises minimum Tier 1 capital levels to 7% and global regulators look set to add a surcharge of 2.5% of risk weighted assets on top of that for systemically important financial institutions (SIFIs).
Regulators have also recalibrated the capital required on the frontier between market and counterparty risk – which banks had seriously underestimated – with a new charge aimed at capturing the volatility in counterparty risk. Banks are already looking at ways to reduce this risk and minimise the capital charges, with some banks revisiting the idea of selling off risk via securitisations. Regulators are, unsurprisingly, nervous.
