Common equity in Tier 1 capital can be as low as 2% of RWAs. Innovative features such as step-up option are allowed in capital instruments. The regulatory adjustments to capital are effected both at Tier 1 and Tier 2 capital in equal measure. The existing definition of capital is, thus, flawed.
Capital is not only deficient in quality equity capital, but also contains elements of debt which do not support the bank as a going concern. As I have stated earlier, big banks entered the crisis with insufficient level and quality of capital. Under Basel III, Tier 1 capital will be the predominant form of regulatory capital.