Banks entered the crisis with inadequate capital. The Basel requirement of common equity was as low as 2% of risk-weighted assets (RWAs). Banks did not calculate the risk-based capital properly. The Basel capital rules favoured lower capital for the trading book and higher capital for the banking book.
Banks exploited this loophole and parked banking book assets in the trading book, indulging in capital arbitrage. Similarly, capital requirement for mortgage loans was higher than capital requirement for mortgaged backed securities (MBS). This encouraged banks to securitize their mortgage loans through a Special Investment Vehicle (SIV) set up by them.