The new regulation requires banks to hold minimum capital to cover the maximum annual loss which may occur once in 100 years. In case of even larger losses, a bank may go bankrupt. Conversely, if there are 100 banks with the bare minimum of capital, one bank could fail per year.
After the removal of blanket deposit insurance, we must strike a balance between maintaining managerial flexibility of financial institutions and avoiding systemic risks. Furthermore, it will become increasingly important in the future to design bank supervision and regulation to avoid hampering financial innovation by the private sector. Such thinking has already been adopted in the new Basel Capital Accord.