loss - absorption buffer – means of protection – against the asset losses of a bank. it is meant to be at levels high enough to absorb unanticipated losses with enough margin so as to inspire confidence and enable the bank to continue as a going concern, in particular, without passing on losses to bank creditors. once the capital level is fully consumed by the deteriorating financials, it exposes the unsecured creditors, including depositors, to bear the losses. while the deposits typically are insured up to a certain level, economic history shows that more often than not the ultimate costs of paying off all deposits fall on the sovereign, especially in the case of large, complex and inter - connected banks. capital constraints at a wider, systemic level also impact the resolution of weak banks. the united states experience, empirically documented by granja, matvos and seru ( 2017 ), shows that an optimal bidding strategy of a healthier bank – a potential acquirer, which may value the weaker bank for its franchise value from deposits, gets adversely impacted if it is itself poorly capitalized. in such a scenario, the overall value realization for the weak bank goes down. the poor capitalization of potential acquirers can also drive a wedge between their willingness and ability to pay for a failed bank. in this manner, bank capital being at healthy levels also has a system - wide loss - absorption role by helping sell weak banks to healthy ones in an efficient manner. given this criticality of bank capital in absorbing losses, it is natural why minimum bank capital requirements are in place globally and why capital becomes one of the most important factors for supervisors to monitor. in the aftermath of the global financial crisis, there has been a complete overhaul of the international regime for minimum regulatory capital requirements of banks, as enshrined in the revised basel norms, viz., basel - iii. the goal of basel iii is to raise the quality, consistency and transparency of the capital base of banks to withstand unanticipated losses and to strengthen the overall risk coverage of the capital framework. in addition to revising the minimum capital ratio requirements for credit risk, basel iii also introduced a capital conservation buffer ( ccb ) and a countercyclical capital buffer. ccb is designed to ensure that banks build up a capital buffer outside periods of financial stress that can be drawn down when banks face financial ( systemic or idiosyncratic ) stress. banks which draw down their capital conservation buffer during

zombie lending by under - capitalised banks. it was only after the implementation of the of financial revival program ( takenaka plan ) starting in 2003, involving more rigorous evaluation of bank assets, increasing of bank capital, and strengthening of governance for recapitalised banks, that the japanese banks finally stopped the process of ever - greening non - performing loans and started to accumulate capital through retained earnings over the next five years. in addition to the above evidence on japan which i covered in some detail in the 8th r k talwar memorial lecture, my recent joint work with sascha steffen and lea steinruecke, titled “ kicking the can down the road : government interventions in the european banking sector, ” examined all government interventions in the eurozone banking sector during the 2007 to 2009 financial crisis. in particular, we analysed the implications of these interventions in the european banking sector for the subsequent sovereign debt crisis and found that : ( i ) governments with weaker public finances were more reluctant to recapitalise distressed banks during the financial crisis ; and, ( ii ) the resulting insufficient recapitalisation of distressed banks had significant negative consequences for the efficiency of real sector lending. in particular, weak banks remained vulnerable to future shocks and increased their risk - taking. furthermore, these banks did not write down defaulted loans but instead ever - greened loans to zombie borrowers, crowding out in the process credit extension to healthier borrowers. the case for regulatory prompt corrective action how should under - capitalised banks, and more generally, banks whose asset quality and profitability make them vulnerable to further stress, be dealt with, taking cognizance of the reality that the strength of market discipline by bank creditors is blunted by the presence of explicit and implicit government guarantees? this question received significant academic and policy - maker attention in the united states following the savings & loans ( s & l ) crisis, in which by mid - 1980 ’ s, so many thrifts had to be resolved at such low levels of capitalisation that in the end a significant government bailout in the form of blanket deposit insurance had to be engineered. effectively, it had been left until too late to exercise regulatory discipline that could have substituted for the lack of adequate market discipline ; as a result, the authorities had to engage in excessive forbearance and full - scale bailout. key insight that emerged from the debate around the s & l crisis was that the banking regulator needed to adopt a