Requiring banks to enhance the quality and quantity of their capital and liquidity reserves is one way to help make the financial system safer. But it’s only part of the solution.
Regulators’ short-term response to the global financial crisis has been to require banks to hold more capital with the aim of increasing their capacity to buffer unexpected losses. They have also introduced mechanisms to counter model risk and measurement error in capital adequacy calculations. These efforts have been primarily driven by the Basel Committee on Banking Supervision and the Financial Stability Board.