This is important because the crisis demonstrated that bank investors and debt holders have a strong presumption that only common equity is truly loss absorbing outside bankruptcy. In the crisis, as losses climbed, Tier 1 capital ratios were eroded from the bottom, with tangible common equity ratios sometimes shrinking to levels that raised questions about a bank’s viability and its ability to access the equity and debt markets. Although common equity is typically a higher-cost form of capital for banks, it absorbs losses on a going-concern basis and so preserves an institution’s viability in the eyes of the market much better than other forms of Tier I capital, such as perpetual preferred stock or trust preferred securities (TRUPS). Second, the standards create a new definition of what constitutes common equity. The emphasis is on the ability of common equity to be loss absorbing. For that reason, there are limits on the amount of the assets that are not readily saleable or loss absorbing that can be counted toward a bank’s tangible common equity. These include assets such as mortgage servicing rights and deferred tax assets. Also, there is strict treatment of equity tied up in the form of minority interests. That is because this invested equity is not immediately available to the parent company to absorb losses in that company’s operations. Third, the minimum required ratio of total tangible common equity to risk-weighted assets will be increased significantly. Once the new standards are fully phased in, it will have to equal 4.5 percent of risk-weighted assets.
Rodrigo Vergara: Global liquidity, spillovers to emerging markets and policy responses Opening remarks by Mr Rodrigo Vergara, Governor of the Central Bank of Chile, at the XVII Annual Conference on “Central banking, analysis and economic policies” of the Central Bank of Chile, Santiago de Chile, 14 November 2013. *  *  *  I thank Claudio Raddatz, Luis Oscar Herrera, and Consuelo Edwards for helpful comments. Good morning. Welcome to the Central Bank of Chile’s Seventeenth Annual Conference on Central Banking, Analysis and Economic Policies. This year, our conference focuses on “Global Liquidity, Spillovers to Emerging Markets and Policy Responses”. You will probably agree with me that this is a very timely topic. The global financial crisis that started in 2008 prompted a quick and decisive reaction of monetary authorities around the world. The central banks of most countries soon slashed interest rates to boost their economies, and implemented various types of facilities to inject liquidity into troubled financial markets. However, while most emerging markets reversed some of these policies as their economies recovered, advanced economies have maintained historically low interest rates and engaged in unconventional policies that last to these days. I will discuss today some of the policy issues around these developments and share some thoughts about the pending research questions along the way. These years of global liquidity expansion have coincided with a surge in gross capital inflows into emerging markets, a real appreciation of their currencies, and an increase in the prices of their main commodities, stocks, and houses.