Among other things, the application of Basel III will entail an increase in the minimum level of core capital, which will rise from 2% to 4.5%, and the creation of a capital conservation buffer of 2.5%. Accordingly, banks must at all times maintain a level of high-quality capital of, at least, 7% of risk-weighted assets. In addition, there will be a countercyclical capital buffer of  BIS central bankers’ speeches  1  up to 2.5%, which for the first time introduces a macroprudential component into the regulation of capital levels, whose ultimate aim is to smooth the fluctuations in credit over the course of the cycle. The new Basel III framework further includes other important additions. These include most notably the introduction of a leverage ratio in which assets will not be risk-weighted and the introduction, for the first time, of liquidity requirements. On one hand, the liquidity coverage ratio will require banks to hold a sufficient volume of liquid assets to withstand scenarios of tension. On the other, the introduction of a net stable funding ratio is envisaged, whose aim is to limit maturity mismatches. The new regulation envisages that these new standards, to which the changes in the definition of capital must be added, will be applied progressively, such that the transition period will finalise in 2019. The aim is to prevent the strengthening of banks’ solvency from being achieved at the expense of a reduction in the financing that banks provide to the economy as a whole.
Indeed, the current turmoil has underscored the importance of robust liquidity management by banks, as well as the need for supervisory approaches which keep pace with structural market developments. Many initiatives with a view to addressing issues and risks arising from the recent financial market turbulence that go into the right direction have already been launched, both at the international level, namely by the Financial Stability Forum, and at the EU level, with the ECOFIN agreeing to a roadmap for action by 2008, and also by the private sector. They must be pursued now with even stronger impetus. In this respect, co-ordination at the global level should be ensured. In closely interlinked financial markets, any policy measure should be agreed to and consistently applied at the international level. Fifth, in the same vein, there is a need to reflect carefully on the “originate-anddistribute” business model. The period ahead is likely to provide a first material test of changing banking business models and the increased reliance on secured funding. Although currently profitable and well capitalised, many banks will experience income and credit losses, which may trigger a re assessment by some of them of the suitability of the so-called originate-and-distribute business model. The current episode has also shown that the transfer of credit risk outside the banking sector may ultimately not be effective. This is related with reputational and other concerns, which induce banks to take credit risk back onto their balance sheets.