At the end of last year the Basel Committee on Banking Supervision published its new Capital Framework for internationally active banks, known as Basel III. Basel III tries to do several things, but its main aim is to ensure that banks have bigger capital and liquidity buffers, so that they will be less highly leveraged than in the past.
When a bank could operate at a leverage ratio of $ of equity to every $ of assets, it was clearly too highly leveraged. It meant that losses of as little as two percent on the bank’s asset portfolio could wipe out its entire capital.