Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

The rest of the US delegation did not go so far as Bair. The compromise that resulted was a substantial change but by no means radical. The new rules specified 7 percent as the basic minimum requirement for Tier 1 common equity in relation to risk-weighted assets for all banks. However, systemically important banks were required to hold higher amounts, depending on their size and impact on the world economy. Between November 2014 and January 2019, the twenty-nine selected institutions would be required to raise their capital in relation to risk-weighted assets to between 8 and 12.5 percent, depending on their degree of systemic importance.66 A further 3.5 percent could be added in the form, for instance, of convertible bonds that at moments of stress transformed from bonds to equity. Crucially, unlike under Basel II, leverage was measured two ways. The basic standard was set with regard to risk-weighted assets, which banks could calculate according to arcane in-house formulae. But as a cruder test of solidity, risk-weighted leverage would be checked against a simple ratio of total bank assets to loss-absorbing capital. This was not to fall below a 3 percent “leverage ratio” of equity to assets. This left Bair and her fellow campaigners indignant. In the United States, by way of the Collins Amendment and the standard set by the FDIC, the bar was raised higher. But if more was not done at Basel, it had less to do with the American delegation than with opposition from Europe.