The global regulatory framework failed to prevent the build-up of risk in the financial system in the years leading up to the recent financial crisis. The sources of this failure were manifold, including insufficient capital and liquidity requirements for banking firms; inadequate and fragmented supervision and regulation of bank and non-bank financial firms that posed a threat to the stability of the financial system; and lack of oversight more generally over the non-bank financial sector. In this policy statement, the Department of the Treasury (Treasury) sets forth the core principles that should shape a new international capital accord to better protect the safety and soundness of individual banking firms and the stability of the global financial system and economy.
We recognize that regulatory capital requirements are only one tool among many that supervisors should use. Activity restrictions, constraints on credit concentrations and liquidity risk, underwriting standards, market discipline, and supervision of risk management and corporate governance practices, among other things, are all indispensable elements of a robust program of oversight for banking firms. But capital requirements have long been and will remain a principal regulatory tool used by supervisors to promote the safety and stability of the banking system.
A principal lesson of the recent crisis is that stronger, higher capital requirements for banking firms are absolutely essential. At the same time, we recognize that stricter capital requirements for banking firms are not without cost. Stricter capital requirements generally will reduce the amount of financial intermediation and may limit credit availability. The objective in designing a regulatory capital regime should be to maximize the prospects for financial stability without unduly curtailing credit availability, financial innovation, economic growth, or the ability of banking firms to attract private investment.