tier 1 capital requirement, must reflect the risk the bank exposes itself to. a bank ’ s exposures are therefore assigned different risk weights. experience shows that banks ’ losses on residential mortgage loans, which are highly collateralised, are lower than on corporate loans. risk weights are therefore lower for residential mortgage loans than for corporate loans. the financial crisis has revealed shortcomings in the definition of the minimum tier 1 capital requirement and changes will be made in both the numerator and the denominator. the quality of tier 1 capital will be subject to stricter requirements. risk weights for some exposures will be higher, with improved risk coverage for trading book and off - balance sheet exposures. the minimum tier 1 capital ratio may also be changed. there is no simple answer to the question of the correct capital level for a bank. in order to quantify risk, banks have developed risk models. risk can be calculated using advanced methods, but the figures on which the calculation is based too often reflect the current economic situation. the possibility that the situation can change abruptly is not sufficiently taken into account. it became evident during the financial crisis that risk measured beforehand in a model can differ substantially from the actual outcome observed. due to risk model uncertainty, many investors prefer to take account of a bank ’ s ratio of equity capital to total assets. the basel committee has proposed the introduction of such a simple, non - risk based measure, i. e. a maximum leverage ratio requirement ( minimum equity ratio requirement ). a minimum equity ratio requirement also limits the number of times banks can leverage their equity. with a minimum equity ratio of 5 per cent, for example, equity can be leveraged 20 times. today, capital requirements for residential mortgage loans in particular are very low. the risk models employed by nordic banks seem to apply risk weights for residential mortgage loans that are as low as between 7 and 15 per cent. banks seeking to “ put equity capital to work ” are under very strong pressure to increase leverage. a risk weight of for example 10 per cent for residential mortgage loans with a minimum tier 1 capital requirement of 4 per cent would mean that nok 1 in equity capital could be behind as much as nok 250 in residential mortgage loans. introducing a leverage ratio requirement could have the effect of curbing banks ’ debt financing and risk - taking. banks in canada are subject to both a strict national capital adequacy requirement and a maximum leverage ratio. banks are required to maintain a minimum

. as we all know, more than 100 countries implemented basel i which indicates the widespread impact it had on the bank regulation and risk management. basel i proposals forced the banks to look at credit risk and regulatory capital more closely than they had done earlier. as banks found ways to arbitrage regulatory capital, some of the provisions of basel i became less relevant. simultaneously, banks in the g - 10 countries developed newer approaches to manage credit risk by building portfolio models for pricing, provisioning and allocating economic capital for the credit portfolios. these developments made the weaknesses in the basel i framework more apparent and this set the stage for the creation of “ international convergence of capital measurement and capital standards : a revised framework ”, popularly known as basel ii. concurrently, there has been a realization that the traditional supervisory practices were out of step with the sophisticated risk management techniques being employed by the complex financial institutions and a risk - based approach to supervision was required to capture the various risks that the firms were undertaking and the controls built for addressing these risks. although there are key differences in design and methodology of risk - based supervision framework in countries like america, canada, uk and australia, yet the underlying principles remain the same : the supervisory processes and tools are reoriented in accordance with the risks in the supervised firms ; specific tools of supervision are targeted to the areas of greatest risk and concern in individual firms and this results in a cost effective allocation of the finite supervisory resources across the regulated entities. basel ii the basel committee on banking supervision1 has observed that the fundamental objective in revising the 1988 accord has been, and i quote, “ to develop a framework that would further strengthen the soundness and stability of the international banking system while maintaining sufficient consistency that capital adequacy regulation will not be a significant source of competitive inequality among internationally active banks. the ( basel ) committee believes that the revised framework will promote the adoption of stronger risk management practices by the banking industry, and views this as one of its major benefits ” 2. unquote. basel ii has brought regulation and risk management to the centre stage : the regulatory capital is more closely aligned to the risks in banks and there is a trend towards convergence of the regulatory and economic capital, especially in the advanced approaches. basel ii rests on the three pillars, pillar i - minimum capital requirements, pillar 2 - supervisory review process and market discipline as pillar 3. pillar 1 – minimum capital requirements for the first time, capital charge for operational risk has been mandated