LEX Repeat after me: banks need more capital and better quality capital. The post-crisis regulatory mantra has been accepted almost universally. But the tricky process of determining what that means is just beginning. It is likely to mean further capital raising by banks globally – not just because, as the head of the International Monetary Fund said on Monday there are substantial bank losses still to be revealed. Capital itself remains a moving target.
There are two basic questions to consider on regulatory capital: what should go into it and what goes on top of it? The first has thus far garnered more attention. Loss- absorbing capital, consisting of common equity and reserves, is in favour while more complicated hybrid structures will be subject to limits. However, varying approaches to the second question – the type of risk-weighted assets that capital is used to support – can make comparisons between banks almost meaningless.
