The “magic” of internal models to calculate risk weights in regulatory capital explains the difference, although the low leverage ratio meant that a loss of 3% of total assets would wipe out banks’ capital.
The value of relationship information became clear when some years ago some new companies – entirely outside the financial sector, such as telecommunications companies – thought about entering the banking business. The business looked very attractive. Telecommunications operators were presented with new possibilities through fast growing internet and mobile phone business. Client bases were exploding and new potential business undertakings proliferating.