Where a firm is significantly dependent on this kind of funding, it may need more common equity to convince counterparties and investors of its solvency during periods in which assets are very volatile and to maintain its solvency should it need to sell assets at fire sale prices.
This microprudential basis for higher capital requirements is complemented by the macroprudential rationale that intermediaries whose deleveraging could have a broad impact on market liquidity through fire sale or related effects should be required to hold still more capital. Let me make three additional points on this rationale for higher capital standards.