Regulatory Capital

Abstract

In the aftermath of the 2008 market events, governments changed quite deeply the way they see and regulate financial institutions Until then, the general idea was that of “light touch” regulation, which means that the governments and regulatory bodies effectively let banks self-regulate and their function was, in practice, little more than a supervision of that self-regulation In 2008/09 the interbank money market dried out, nearly all important banks approached a dangerous cliff, and some fell Governments had to step in as, otherwise, the risk-hedging and deposit-credit cycle that lubricate and feed the global economy would have collapsed, with unthinkable consequences to everyone’s life Those events made it clear to governments that there were a number of financial institutions that were too big to fail If they (governments) were, de facto, the last loss absorbers in the financial system, if they were in charge of running the economy and if they wanted to protect the tax payer’s money, many thought that they should have an important input into how financial institutions are risk-managed As a result, a new era of “tight” regulation started.