Capital, Liquidity and Bank Regulation (Basel)

A bank funds itself mostly with other people's money: a typical large bank has $10–12 of assets for every $1 of its own equity. Capital rules decide how thin that $1 can get; liquidity rules decide how much cash and near-cash the bank must hold against money that can leave. Together they set the size, shape and profitability of every bank on earth, because they determine how much equity each loan, bond and trading position consumes and therefore what return it earns. The global framework is written in Basel, Switzerland, by the Basel Committee on Banking Supervision, and implemented (often late and with local changes) by national regulators. Since 2008 the framework has tightened dramatically: the Basel III reforms raised the core minimum from what was effectively 2% of risk-weighted assets to 4.5% plus buffers, added leverage and liquidity ratios, and created loss-absorbing debt for resolution. The last instalment, the 2017 "endgame", is still being argued over in the US: regulators withdrew their 2023 proposal and re-proposed a lighter version on 19 March 2026 that would reduce aggregate capital for the largest banks (Federal Reserve staff estimates, reported), while the EU began applying its version in January 2025. This section explains what capital is, how risk-weighted assets are calculated, the Basel accords from I to III and the endgame, US buffers and stress tests, leverage ratios, liquidity rules (LCR and NSFR), resolution and loss-absorbing debt (TLAC and MREL), tailoring by bank size, the simpler regime for community banks, and how all of this shapes bank strategy. A worked example computes a stylized bank's capital ratios, stress capital buffer, product-level returns on equity and liquidity ratios.