But it also confirmed that capital standards themselves had been wholly inadequate in a number of respects: Required capital levels were much too low, particularly trading book capital requirements. In evaluating the condition of financial firms at the height of the crisis, markets focused on common equity ratios and virtually ignored the Tier 1 ratio enshrined by Basel I and Basel II.
Moreover, markets and supervisors both used a much more forward-looking capital calculation than under prevailing regulatory requirements – subtracting losses that they estimated would be sustained in an adverse scenario to determine whether firms would have enough capital to remain viable financial intermediaries.