A capital conservation buffer of 2.5 per cent, added to a contra cyclical buffer, will create a stronger shock absorber than previously was the case. This contracyclical buffer is built up when times are good to then provide a safety margin during downturns. The capital adequacy requirement is also complemented with a pure leverage ratio measure, meaning that equity may not fall below 3 per cent of total assets. Under earlier frameworks, other capital, of lower quality, could have accounted for a large part of capital adequacy. This applies to both Additional Tier 1, i.e. other instruments that cover losses while the bank is active (going concern), and Tier 2, which is to say financing instruments that can cover losses if the bank should fail (gone concern) – for example, unsecured debts with long maturities that cannot be redeemed. The crisis has shown that, above all, it is Common Equity Tier 1 that can be counted on when the tide turns for the worse. All in all, the banks’ capital position will be strengthened considerably compared with previous regulations, contributing to the boosting of confidence in the individual banks and in the system as a whole. …clear measures for liquidity… In the autumn of 2008, we saw how a lack of confidence in the financial markets rapidly led to liquidity problems. So one priority for increasing financial stability has been to ensure the banks are able to manage liquidity problems in the short and long terms.
In the fiscal area, the post-crisis recovery has not been accompanied in a significant number of countries, advanced and emerging alike, by a sufficient reduction of structural deficits in public accounts and the halting of the process of rising public debt. More generally, in many cases it may be necessary to move forward with fiscal reforms that seek to reduce the distortions to growth while allowing the most vulnerable sectors of society to be supported more decisively. The limited fiscal space available is exacerbated in the longer run in many economies, principally but not exclusively the advanced countries, owing to the adverse demographic prospects. Ageing populations pose significant challenges for public finances, as they bear on both the revenue and the expenditure sides. On the expenditure side, ageing will considerably affect pension and healthcare spending which, in many cases, will require rethinking pension systems to guarantee their sustainability. On the revenue side ageing leads to changes in the composition of tax bases as it does to lower labour income shares, to capital deepening and to changes in the composition of consumption. In the area of monetary policy, many advanced economies are still in a situation of zero lower bound. More generally, in most countries the room currently available to face a hypothetical recession is less than that existing at previous similar cyclical junctures. Monetary policy also needs re-thinking, on the basis of more long-term challenges for the economy. The natural interest rate has been falling since at least the 1980s.