Strong capital helps banks absorb unexpected shocks and reduces the moral hazard associated with the federal safety net. A key lesson of the banking and thrift crises of the late 1980s and early 1990s is that prudent and explicit minimum regulatory capital requirements are needed to ensure that banks maintain adequate capital and to anchor an effective supervisory system.
For example, explicit minimum regulatory capital requirements that accurately reflect a bank's risk provide more-effective triggers for prompt corrective action. Besides making regulatory capital ratios more risk-sensitive, Basel II provides a consistent framework for improving supervisory assessments of capital adequacy and risk management.