One of the most relevant areas of work under way seeks to correct the excessive variability of risk-weighted assets (the denominator of the capital ratio) prompted by the use of insufficiently homogeneous internal models. Such heterogeneity leads to inadequate risk measurement and generates competitive distortions, harming those institutions subject to more demanding regimes of model supervision. The current challenge is to come up with a parameterisation of the new requirements that enables risk measurement to be enhanced without significantly increasing capital requirements for the system as a whole, as this is one of the commitments announced by  4  BIS central bankers’ speeches  global supervisory authorities, in order to hold prudential requirements at levels compatible with the pursuit of banking activity on a proper footing. Banks must also meet the requirements stemming from the new resolution regulations, which seek to minimise the need to use public funds to manage bank crises. In particular, under the Bank Recovery and Resolution Directive (BRRD), significant institutions shall, in addition to meeting the established capital requirements, have a minimum volume of liabilities enabling losses to be absorbed should it be necessary. That is to say, they shall have debt instruments at hand that may be converted into capital if they experience problems of viability. These requirements will likely prove a binding restriction for some financial institutions. The issuance of these instruments may pose a challenge, especially for unlisted banks with little experience in the issuance of convertible instruments or of subordinated debt.
In this connection, I shall first briefly review the situation of the banking sector, focusing thereafter on the challenges banks will have to face in the short and medium term. I shall conclude with some brief thoughts on the ECB’s new supervisory framework. 1. Recent developments in the banking sector  In recent years, and in response to the financial crisis, banks have substantially improved their solvency levels, largely as a result of the new regulatory and supervisory requirements. At SSM-supervised banks, in the last year alone their highest-quality (i.e. CET1) capital increased on average by 70 bp, from 12.7% in 2014 to 13.4% in 20151. In the case of Spanish banks, whose starting levels were somewhat lower, the increase exceeded 80 bp, making for an average of 12.5% of CET1 at end-2015. The profitability of the banking business, however, remains at low levels and, in any event, far off the double-digit figures seen before the crisis. Among SSM banks as a whole, the return on equity (ROE) in 2015 was slightly below 5%, whereas in Spain, in consolidated terms, it was scarcely 5.6%. Admittedly, it is unusual for the return on capital to stand in most euro area countries at levels below the average cost of capital, on estimates made by the Banco de España. In the case of Spanish banks, estimates of the cost of capital stood at 6.8% in December 2015, drawing close to levels of 8% in early 2016, as a result of the period of instability observed in financial markets.