Bank solvency indicators remain strong, as reflected by capitalization levels, the significant proportion of Tier-1 capital within net capital, and high ratios of loan-loss reserves to past-due loans.1 The strong position of the banking system has been the result of improvements to the regulatory and supervisory framework, including stricter capital requirements and rules for provisioning of reserves based on expected rather than realized losses.
It is also a consequence of lessons derived from experience. In particular, the financial crisis of 1995 dramatically revealed the need for banks to maintain appropriate levels of high-quality capital potentially able to absorb losses on an ongoing basis. It also taught the importance of welldeveloped and liquid financial markets in which economic agents can hedge and diversify their risks.