Strengthen the quality of capital Under the current rules, up to 50 per cent of a bank’s Tier 1 capital can consist of hybrid instruments, which are a combination of debt and equity. The remainder must comprise common equity only. Perpetual capital securities and other hybrid instruments cannot be used as easily as equity capital to absorb losses on a going concern or at liquidation. The possibility of limiting Tier 1 capital to common equity is now being considered. Hybrid instruments make up a large share of Tier 1 capital in many European banks and many banks must strengthen the quality of capital. There is therefore a risk that political processes will prevent any significant increase in the minimum Tier 1 capital requirement. The Norwegian authorities have been restrictive in their approval of hybrid instruments. The Financial Supervisory Authority of Norway – with strong support from the Ministry of Finance during the last 20 years – has ensured that banks have been required to fully consolidate all  BIS Review 131/2009  7  assets when calculating capital requirements. Since established practice in Norway is already strict, the new rules may not in themselves affect banks to any great extent. Capital and macroprudential supervision  A lesson learned from the financial crisis is that regulation of financial institutions should seek to limit risk not only in each bank, but also in the financial system as a whole. Banks’ growth strategies seldom take into account that one bank’s behaviour can affect other banks and the financial system.
There was a constant stream of worries, one thing after another, one disheartening report after another, and minor setbacks were followed by major setbacks. It was reminiscent of an operating theatre. The task was onerous not only because of its proportions, but also because of the oppressive weight of the anxiety that accompanied it.” 2 “The greatest risk lay in the fact that this anxiety had now become pervasive. The very foundations of confidence, the nation’s confidence in its own credit institutions had been shaken … The most important objective was therefore to prevent an avalanche, seek to contain the damage, hang on and hold back. That was the dominant thought, to prevent total collapse, for the danger of this was indeed present… and the general atmosphere of nervousness manifested itself in the most peculiar ways. In the blind panic that ensued, unreasonable attacks were made on institutions that were more than deserving of their depositors’ confidence.” 3 There may have been a similar feeling in many countries last autumn that the “oppressive weight of anxiety had become pervasive”. The recent financial crisis started with problems in the US subprime market. It was difficult to foresee that problems in a small segment of one market could have such dramatic consequences for financial markets the world over. But the financial system had changed. 1  See Knutsen, Sverre and Gunhild J. Ecklund (2000): ”Vern mot kriser? Norsk finanstilsyn gjennom 100 år (Defence against crisis? 100 years of Norwegian financial supervision)”, p.95.