Basel III will require banks to hold 4.5% of common equity (up from 2% in Basel II) and 6% of Tier I capital (up from 4% in Basel II) of risk-weighted assets (RWA). Basel III also introduces additional capital buffers, (i) a mandatory capital conservation buffer of 2.5% and (ii) a discretionary countercyclical buffer, which allows national regulators to require up to another 2.5% of capital during periods of high credit growth. In addition, Basel III introduces a minimum leverage ratio and two required liquidity ratios. The leverage ratio is calculated by dividing Tier 1 capital by the bank's average total consolidated assets; the banks are expected to maintain the leverage ratio in excess of 3%. The Liquidity Coverage Ratio requires a bank to hold sufficient high-quality liquid assets to cover its total net cash outflows over 30 days; the Net Stable Funding Ratio requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress.
No more AIG to hold the gambling books for Goldman Sachs, now a bank holding company, formerly a pure shadow bank, non bank firm. No more trust in S&P, Moodies, Fitch, etc, rating mortgage securities, etc.
Cause and effect. The higher the risk taking, by the largest banks/shadow banks, the more they are forced to raise capital and the lower their compensation over time! Survivor of the Fittest! Law of the Jungle!