Most bankers would agree that the financial crisis has highlighted major shortcomings in the regulatory framework governing minimum bank capital and liquidity. New standards for regulatory capital and liquidity,1 now under discussion at the Basel Committee on Banking Supervision, will likely establish the rules for European banks at least over the next decade and set the tone for local regulation in other parts of the world. Not surprisingly, bankers have dubbed the new rules “Basel III.”
Basel III could significantly change the composition of banks’ Tier 1 capital; risk weights, especially in trading books; and capital ratios. New McKinsey research estimates that the effect of these new rules on Europe’s banks would be a capital shortfall of about €700 billion. This sum would represent a 40 percent increase in the European banking system’s core Tier 1 capital.