Basel III

The reforms respond to weaknesses the crisis exposed: too little capital, capital of poor quality, excess borrowing and sudden shortages of cash. Banks must hold more and better capital, mostly common equity. A simple capital-to-exposure ratio caps balance sheet growth regardless of risk weights. Two buffers sit on top of the minimum, one for conservation and one that varies with the credit cycle, with extra requirements for the largest global banks. For liquidity, the liquidity coverage ratio tests a thirty-day stress and the net stable funding ratio tests funding over a year. Later revisions changed how credit, market and operational risk are measured, and set a floor on internal model results. Analysts meet its ratios in most large banks' annual reports, though differing national timetables mean two banks' figures are not always measured on the same footing.

Under the new standards, a lender reviews its position. Its common equity ratio is adequate, but its capital-to-exposure ratio is close to the minimum and its stable funding is short. The bank decides to retain more profit, sell a low-return loan portfolio and lengthen the maturity of its deposits in order to meet the rules with some margin.