Research shows that people are naturally disadvantaged when it comes to handling risks and probabilities – a deficiency that statistical models can mitigate only to a certain extent. Consequently, banks need universal buffers to prepare for shocks, regardless of where they come from. And, in this context, equity is the most general buffer.
That is why the reform of financial regulation focused on improving the capital rules for banks. However, we still have to feel our way in the dark when it comes to regulation. We have increased capital buffers, but have we reached the right level? This is an issue we must endeavour to shed more light on.