The bad news is they are becoming increasingly less meaningful and progressively undermined as a result of regulatory capital arbitrage. Regulatory capital arbitrage refers to the gaming of the capital standards, the exploitation of loopholes that allows banking organizations to lower the amount of capital for a given level of risk.
Regulatory capital arbitrage has been encouraged by the limitations of and excessive rigidity in the current capital standards. To be sure, it serves as a kind of safety valve, preventing the capital rules from distorting bank behavior in non-economic ways. But capital arbitrage also undermines the effectiveness of our capital rules and creates some economic distortions.