The structural dimension addresses the concentration of risk and interlinking The structural (or cross-sectional dimension) relates to how the concentration of risk and the links between different parts of the financial system at any given time affect the risk of a crisis hitting the system as whole. I have already discussed the links between financial institutions and the contagion risks these entail. Existing and newly-invented tools have been proposed and applied to deal with these structural risks. The former include stricter capital adequacy requirements and limits on activities and exposures. The newly-invented tools include plans to manage banks in crisis (so-called recovery and resolution plans), liquidity requirements and special capital adequacy requirements for institutions that are deemed to be systemically important. Work is underway within the framework of the Basel Committee to identify globally systemically important banks which will be subject to stricter capital adequacy requirements. The Swedish authorities’ demand for a higher level of capital adequacy in our major Swedish banks is of course an example of the same thinking. The cyclical dimension addresses risk management over time The cyclical dimension (also referred to as the dynamic dimension or the time dimension) relates to how risks in the system as a whole can develop over time. The crisis and the period preceding it clearly illustrate the tendencies towards exaggerated cyclical behaviour that often characterise the financial markets. The demand for loans usually increases during periods of strong growth, and the perception of risk often appears to weaken.
8  BIS central bankers’ speeches  have been able to keep risk weights low, which has meant that they have not had to maintain so much equity. New frameworks are being established on the basis of these insights. Here, I will briefly explain what Basel III – the new regulatory framework for the banks – entails. I will also briefly discuss the thinking behind macroprudential policy, which has become something of an in-word in recent years. Basel III increases demands on the banks The most important areas of the global Basel III Accord deal with the quantitative demands for capital and liquidity being placed on the banks. The banks are to have sufficient equity… As financial crises can lead to considerable losses, the Basel Committee maintains that the banks need substantial resilience. So capital requirements are being increased in Basel III, above all for Common Equity Tier 1.10 The minimum requirement for the banks’ equity is being set at 4.5 per cent of risk-weighted assets – more than double the requirement under Basel II. A capital conservation buffer of 2.5 per cent, added to a counter-cyclical buffer, has created a stronger shock absorber than previously existed. I will return to the counter-cyclical buffer when I discuss macroprudential policy. The capital adequacy requirement can also be complemented with a pure gross solvency measure, meaning that equity may not fall below 3 per cent of total assets.