A veil of tiers

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...