What has been the global response? The Basel III package addresses these flaws. Most importantly, capital requirements have been tightened by more than doubling the minimum common equity requirement and also imposing, on top of that, a capital conservation buffer of 2.5 per cent of risk weighted assets (RWA) which can be drawn down in periods of stress.
Further, new measures have been imposed to contain systemic risk in both the time and space dimensions. In the time dimension, the risk stems from the procyclical behaviour of financial institutions.