10 In effect the Spanish model treats the countercyclical element in a bank's capital as a reserve for use during a downturn, to enable banks to continue lending as the economic situation deteriorates.
Given the constant pressures from financial institutions to find ways to reduce capital requirements, including through off-balance sheet activities, regulators will have to be on their toes in the cat-and-mouse game between regulator and regulatee, to ensure that effective capital ratios do not get whittled away as a result of financial innovation and political pressures.