In brief, the idea is that a bank’s distribution of capital to shareholders or employees will be progressively more restricted as capital levels fall below required buffers, but – unlike the case where capital levels fall below minimum requirements – a bank need not bring its capital levels above the buffer by shedding assets or raising new capital.
At the micro, firm-specific level, many firms were too aggressive in gaming the system. The risks that built up in the trading book with inadequate regulatory or economic capital were a case in point.