The capital ratio conundrum

Facing depressed capital ratios, a number of banks have looked to raise new funding following the subprime crisis. Others have attempted to tackle the problem by reducing the minimum regulatory capital. Ahmet Yetis analyses two techniques for managing regulatory capital under Basel II and looks at the implications of widening credit spreads for the cost of regulatory capital management

Having written off more than $500 billion since the beginning of the credit crisis, banks have been rushing to raise capital in recent months. So far, about $325 billion of fresh capital has been injected into the global financial system, according to Bloomberg, and it seems this trend will continue for a while. Although some banks have raised capital to strategically position themselves in the current market environment, most banks need funding to improve their regulatory capital ratios.

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