be addressed. to improve the comparability of the methods used to calculate the capital requirements, the basel committee is aiming to curtail banks ’ leeway in weighting risk. for example, it is hard to assess the probability of default for low - default portfolios which include exposures to sovereigns, large companies or banks because – as the name suggests – the respective credit events are very rare. to some extent, the calculation of regulatory parameters for such low - default portfolios falls under what is known as the “ turkey illusion ” : imagine you are a turkey. every day you are approached by a man who feeds you. what kind of mental model of what happens when he appears do you think you ’ ll build up? however, thanksgiving is coming … measures under consideration to reduce the leeway for banks using an internal - ratings based approach include the implementation of floors based on the standardised approach, restrictions on using internal estimates of certain parameters for risk calculation purposes, and the exclusion of certain asset types from the model - based approach. efforts are also underway to make the standardised approach more risk - sensitive. however, it should be noted that using different methods to calculate risk - weighted assets is not a problem per se. to some extent, deviations are acceptable and reasonable ; otherwise we would ultimately be calling into question the very rationale of the internal models - based approach. bis central bankers ’ speeches 3. beyond basel iii when basel iii is fully implemented, regulatory capital requirements will be significantly higher and tougher than under basel ii, and the financial system will be more stable than before. a typical credit institution will have to achieve a capital ratio of 8 % plus various buffers. but will that be enough? to give a profound answer to this question, we would first need to have an idea of what would be an optimal, or at least an adequate, capital ratio. academic research on this subject is not very broad. however, a recent study by several central bank economists found that a capital ratio of around 11 % would be a reasonable figure. 2 that number exceeds the basel iii minimum requirement but falls well short of “ more radical proposals ”. of course, there is a trade - off between the benefits and costs of higher capital requirements which lies at the heart of the optimisation problem in the study i just mentioned. on the one hand, higher capital requirements reduce bank leveraging, the risk of bank failures and the implicit subsidies given to banks on account of deposit insurance

of the us subprime crisis, significant progress has been made on the regulatory agenda. unsurprisingly, there are mixed views on whether or not the implemented regulatory reforms are sufficient. j huerta de soto ( 2006 ), money, bank credit and economic cycles, auburn. bis central bankers ’ speeches in any case, the way representatives of the banking industry view matters is quite unlike the general public ’ s perception : while the prevailing impression among the public at large is that next to nothing has happened, industry representatives are already complaining of a surfeit of regulation. in my opinion, neither is true. regulation has been significantly tightened, but there can be no question of overregulation. the most important regulatory step was the introduction of stricter capital requirements and new liquidity rules under basel iii. the new capital adequacy rules that were implemented into european law by crd iv and crr with a transition period until 2019 require banks to hold better and more capital. according to the basel committee ’ s latest basel iii monitoring exercise, most large internationally active banks already meet the fully implemented capital minimum requirements. banks ’ loss absorbing capacity is much better than it was before the financial crisis. between mid - 2011 and end - 2013, the average cet1 ratio of large and internationally active german banks, for example, almost doubled from just 5 % to 9. 5 %. the leverage ratio of those banks improved from 1. 7 % to 2. 6 %. the introduction of the leverage ratio – which has a target ratio of 3. 0 % under basel iii – is without doubt a sensible supplementary measure to the risk - based capital requirements. starting in 2015, banks will be required to disclose the leverage ratio, with a view to migrating it to a pillar 1 requirement by 2018 after a final calibration. the leverage ratio is a useful complement as a backstop, all the more so as the basel committee has identified that risk weights for credit risk vary significantly across banks using an internal ratings - based approach. the risk - based approach must, however, remain a key element of the capital rules. having a leverage ratio as the single rule would offer banks problematic incentives to take greater risks. i therefore agree with my colleague mark carney from the bank of england who has said, in this context, that it is sometimes good to wear a belt and suspenders to prevent your trousers from falling down. that being said, the flaws of the risk - based approach need to