Once the MDA thresholds are breached, banks face automatic restrictions on their profit distributions to ensure that they keep funds on their balance sheet. Banks will likely want to avoid these restrictions – even in a systemic event. In such an event, banks may have the incentive to prop up capital ratios by deleveraging and disposing assets instead of dipping into the buffers.
In the third phase, since autumn 2008, a sudden and disruptive re-pricing of sovereign credit risk has taken place. Government bond yields started to diverge, sometimes reaching levels that matched and exceeded those of the early 1990s. There were fundamental reasons for such a re-pricing of risk.