Meeting this standard will require a considerable strengthening of existing requirements, both with respect to the amount of capital held and to the quality of that capital. As to the former, it is particularly important that the risk weightings associated with traded instruments be substantially increased.
As to the latter, the crisis confirmed what many of us have long believed – that common equity is by far the best measure of a firm’s loss absorption capacity. During the crisis, regulators, counterparties, and market analysts all looked to levels of common equity as the key measure of a firm’s durability in the face of extraordinary financial stress.