The higher capital ratio required under Basel III is not only mathematically possible by increasing the numerator (an institution’s capital). Rather, a reduction in the numerator (a decrease in assets) is also possible. Such a reduction is desirable as far as risky financial instruments and proprietary trading positions are concerned. However, such a reduction would be undesirable if loans to companies and households are involved. – In principle, the tension between the need for greater financial stability through more equity on the one hand and disruptive effects on credit growth on the other can probably only be balanced over a long time axis. For this reason, Basel III provides for a gradual increase in the hard capital to be held in the future and the capital conservation buffer, starting at 3.4 percent in 2013. Institutions are thus given time to raise the higher capital requirements not by restricting loans but by retaining profits (profit accumulation) or by increasing capital (increase in capital).

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
E-mail address: info@ekrah.com
https://de.wikipedia.org/wiki/Gerhard_Ernst_Merk
https://www.jung-stilling-gesellschaft.de/merk/
https://www.gerhardmerk.de/

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