There are several reasons for this shift (which is reflected in pillar two of the revised Basel Accord). First, the rapid development of new instruments and methods of risk management make mechanical application of balance sheet ratios inappropriate. Second, regulation inevitably creates incentives for financial engineers to find a way around the rules.
More generally, regulation is too blunt an instrument to capture the technicalities and the sophistication required to control risk in a complex financial organisation. To be effective, increased reliance on supervisory oversight requires an upgrading of supervisory capacity, both in terms of staffing and skills.