Regulators are increasingly seeking to ensure that banks match their risk to the amount and quality of their capital, as well as carrying an extra cushion for low-probability events. And banks have concluded that there are advantages in fine-tuning capital use, as much for internal risk management and risk/reward measures as to satisfy the regulators.
Despite the appeal of new approaches to squeezing the most out of resources, Tier 3 capital, the latest capital instrument allowed by European Union (EU) regulators, is getting off to a slow start. Since last year, banks have been allowed to include this two-year short-term subordinated debt as part of their capital base for regulatory purposes. Previously the minimum maturity was five years. But Tier 3 capital can be used only to support a bank's trading activities, not its banking book. And so far few banks have found a good use for this highly...
