The Bank for International Settlements' Financial Stability Institute (FSI) has published an FSI Brief that reassesses the post-Great Financial Crisis bank capital framework and argues that, while reforms have strengthened resilience, the current capital stack is overly complex and some components deliver limited loss absorbency. The paper sets out a conceptual framework for how different layers of capital should support microprudential, macroprudential and resolution objectives, and proposes technical changes intended to improve effectiveness while maintaining overall stringency. The analysis highlights two main problem areas. First, buffer design and “usability” can be insufficient in system-wide stress, with the countercyclical capital buffer largely geared to credit-boom risks and non-adjustable buffers carrying penalties that can discourage voluntary drawdowns. Second, minimum and resolution requirements can be poorly aligned with their intended functions, creating multiple potential resolution triggers and wedges between the point of non-viability and the point of entry into resolution, while also relying on instruments such as Additional Tier 1 that may not reliably absorb losses on a going-concern basis. To address this, the paper proposes adding a cycle-neutral adjustable buffer component to the countercyclical capital buffer and optionally removing the capital conservation buffer, establishing a single minimum requirement met entirely with Common Equity Tier 1, and replacing total capital and total loss-absorbing capacity layers above the minimum with an additional resources for loss-absorbing capacity (ARLAC) requirement met fully with eligible junior debt. Under the proposed structure, ARLAC would apply to all banks and scale with systemic importance, and penalties would be differentiated so that only breaches of the CET1 minimum would trigger entry into resolution. The brief does not propose a quantitative recalibration, emphasising that calibration should be addressed holistically and left for further analysis.
Bank for International Settlements - Financial Stability Institute 2025-11-24
Bank for International Settlements' Financial Stability Institute publishes brief proposing CET1-only minimum capital and debt-based ARLAC to simplify the regulatory capital stack
The Bank for International Settlements’ Financial Stability Institute has published an FSI Brief reassessing the post-Great Financial Crisis bank capital framework, finding that while resilience has improved, the capital stack is overly complex and some elements provide limited loss absorbency. It proposes a redesign that adds a cycle-neutral adjustable component to the countercyclical capital buffer, removes the capital conservation buffer, sets a single Common Equity Tier 1 minimum, and replaces total capital and total loss-absorbing capacity layers with a loss-absorbing capacity requirement met fully with eligible junior debt, with resolution triggered only by breaches of the Common Equity Tier 1 minimum.