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“A total of 223 banks participated in the current study, comprising 101 large internationally active banks (“Group 1 banks”, defined as internationally active banks that have Tier 1 capital of more than $4.8 billion) and 122 Group 2 banks (ie representative of all other banks),” the Committee said in its report.
The report indicated that Europe’s largest banks still trailed behind their global counterparts in reducing the shortfall; they were $94 billion short in meeting new rules of operation.
The more stringent rules were enacted in 2011 partially in response to the 2008 global financial crisis, which led to the fall of several banks that made bad loans.
The rules, the European Banking Authority says, require major banks to triple the capital they had before 2008, and to have a “core capital buffer equivalent to at least 7 percent of their assets on a risk-weighted basis by January 2019.”
The Basel Committee is urging banks to begin to adhere to the new set of rules as they apply “health stress tests” of their operations.
Stress tests of banks have been applied since 2009 to determine weak spots early on and apply corrective measures. Banks face simulations of very challenging scenarios, such as near-zero GDP growth and surging unemployment, to gauge whether there is enough capital to overcome the hurdles, such as credit and market risk, and liquidity risk.
The fall of Lehman Brothers, the fourth largest investment bank in the US, was caused by a failure to account for many of the above risks at the height of the sub-prime mortgage crisis there. Some economists believe the collapse of the bank exacerbated the global financial crisis.