If, for example, the bank’s balance sheet is less than transparent, potential investors or creditors, seeing the nominally high 10 percent capital, but not recognizing that the economic risk capital allocation should, in percentage terms, be much higher, could direct an inappropriately high level of scarce resources toward the bank. Credit derivatives are another example of the evolution.
The bottom line is that, as we move into the 21st century, traditional notions of “capital adequacy” will become less useful in determining the safety and soundness of our largest, most sophisticated, banking organizations.