ll l d h

Fallacies, Irrelevant Facts, and Myths ll
l
d
h
in the Discussion of Capital Regulation:
in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive
Anat R. Admati
Peter M. DeMarzo Martin F. Hellwig Paul Pfleiderer
Challenges to Financial Stability Policy Workshop Bank of England
March 23, 2011 Balance Sheet Fallacies: Confusing Language
Balance Sheet Fallacies: Confusing Language
•
“Banks have an incentives to minimize the capital the hold, because reducing
capital frees up economic resources that can be directed to profitable
investments.” (“An Explanatory Note on Basel II Risk Weight Functions,” Basel
Committee, July 2005.)
•
“Capital is the stable money banks sit on... Think of it as an expanded rainy day
fund.” (“A piece-by-piece guide to new financial overhaul law,” AP July 21, 2010).
•
“The B
“Th
British
iti h B
Bankers'
k 'A
Association
i ti … calculated
l l t d th
thatt d
demands
d th
thatt th
they b
bolster
l t th
their
i
capital will require the UK's banking industry to hold an extra £600bn of capital that
might otherwise have been deployed as loans to businesses or households.”
The Observer (July 11, 2010).
•
“Every dollar of capital is one less dollar working in the economy” (Steve
p
by
y Floyd
y Norris, “A Baby
y Step
p
Bartlett, Financial Services Roundtable, reported
Toward Rules on Bank Risk,” New York Times, Sep. 17, 2010.)
•
"It's just not worth it to have all that capital trapped" (A lawyer advising banks on
h
how
tto restructure;
t t
“Foreign
“F i Banks
B k Find
Fi d Loophole
L
h l O
On US C
Capital
it l R
Rule,”
l ” Wall
W ll St
Streett
Journal, Feb 18, 2011.)
Assets: Loans to
home buyers and
productive enterprises Funding: Equity (capital) g q y( p )
and Debit (depositors and other creditors)
What is “Capital”
What is Capital and What is the Debate?
and What is the Debate?
• Language often confuses two sides of the balance sheet. Language often confuses two sides of the balance sheet.
– “Capital” is on the right hand (liabilities and equity) side.
– Capital requirements are about funding and leverage.
Capital requirements are about funding and leverage
– Reserve and liquidity requirements constrain the asset side of the balance sheet.
the balance sheet.
• “Regulatory capital” often allows securities other than equity such as trust preferred hybrid securities etc
equity such as trust preferred, hybrid securities, etc. • In this discussion, focus on equity.
– “HOLD” capital = fund with equity.
– Hybrids and subordinated debt (“Tier 2”) are problematic.
– This refers to the numerator in capital ratio. 4
The Denominator in Capital Ratio “Risk‐Weighted Assets” vs Total Assets
International Monetary Fund Global Financial Stability Report, April 2008
5
Historical Facts About Bank Capital
p
• In 1840, equity funded over 50% of bank assets in US.
• Over the subsequent century equity ratios declined consistently to single digits.
• There is evidence that steps to enhance “safety net” contributed to this. In the US
– National Banking Act, 1863
– Creation of the Fed, 1914 ,
– Creation of FDIC, 1933.
• Similar trends in UK, Germany. More trading business.
l
d
d b
q y
y
y
• Bank equity did not have limited liability everywhere in the US until 1940s! History of Banking Leverage in US and UK (Alessandri and Haldane, 2009) 7
More Recent Banking Sector Leverage
More Recent Banking Sector Leverage
• Bank Assets approached 30x Capital
Bank Assets approached 30x Capital
Euro Zone
Euro Zone
US Investment Banks
United Kingdom
Canada
US Commercial Banks
8
Deleveraging “Spirals”
Deleveraging Spirals
•
 30% Balance Sheet Contraction
30% Balance Sheet Contraction
A 1% Asset Decline
A 1% Asset Decline …
•
•
•
Equity
Asset Fire Sales
Illiquidity / Market Failure
Reg. Uncertainty / Bailouts
1%
Asset Liquidation
Loans & Invest
ments
Assets
Debt
Liabilities
30%
Loans & Invest
ments
Assets
Equity
Debt
Liabilities
9
What if Banks were A LOT Less Leveraged?
g
Imagine 15%‐20% equity to total assets, Jan. 2008
• Deleveraging multipliers would have been significantly lower.
• Solvency would have not been as big a concern
• The liquidity problems would not have been as severe The liquidity problems would not have been as severe
• There may have not been a credit freeze
• The crisis would not have been anywhere near as bad as it was....
– Compare: Internet “bubble” bursting: • no leverage!
Basel II and Basel III Capital Requirements
Basel II and Basel III Capital Requirements
• Tier 1 capital Ratio: Equity to risk‐weighted assets: – Basel II: 2%, Basel II: 2%
– Basel III: 4.5% ‐ 7%. – Definitions changed on what can be included. • Leverage Ratio: Equity to total assets: – Basel II: NA
Basel II: NA
– Basel III: 3%. • Tier 2: complete to 8% (Basel II), a bit more (Basel III)
Tier 2: complete to 8% (Basel II) a bit more (Basel III).
• Basel II never fully implemented in the US. “Overwhelmed by the recent crisis scarcely after it has been introduced ” (Haldane, 2010)
recent crisis scarcely after it has been introduced.
(Haldane 2010)
• Basel III: Very long implementation period (decade).
• Will Basel III help prevent another crisis? Mantra: “Equity
Mantra: Equity is Expensive!
is Expensive!”
•
“More
equity… would restrict [banks’]
[banks ] ability to provide
loans to the rest of the economy. This reduces growth and
has negative effects for all.” Josef Ackermann, CEO of
Deutsche Bank (Nov
(Nov. 20,
20 2009).
2009)
• “[D]ouble
[D]ouble-digit
digit [capital] ratios will undermine lending
lending.”
Vikram Pandit, Citi CEO, Financial Times, November 10,
2010).
• “[C]apital adequacy regulation can impose an important
costt because
b
it reduces
d
th
the ability
bilit off b
banks
k tto create
t
liquidity by accepting deposits.” Van den Heuvel (2008, p.
299).
)
Leverage and Lending Spread in US (over 3‐Months Treasuries) Lending Spreads have Not Decreased with More Leverage
g p
g
13
Is Bank Equity “Expensive?”
q y
p
• Yes, privately for banks, but almost entirely because of public subsidies to debt!!
because of public subsidies to debt!!
–Tax advantage: the more debt, the lower the tax bill.
h
b ll
–Underpriced
Underpriced guarantees
guarantees
• Underpriced deposit insurance.
• Implicit guarantees
I li it
t
py
g
• Both imply that borrowing rates do not fully reflect riskiness of assets.
•B
Bottom line: debt is attractive; equity is tt
li
d bt i tt ti
it i
penalized. The “Safety Net”
• Motivation: stability, prevent inefficient runs.
• Composition: – Deposit insurance – liquidity window – Implicit backing of government sponsored enterprises I li it b ki
f
t
d t
i
– Too‐big/important/interconnected‐to fail. • C
Covered 45% of US bank liabilities in 1999 (Walter and d 45% f US b k li biliti i 1999 (W lt
d
Weinberg, 2002), 59% of bank liabilities in 2008 (Malysheva
and Walter, 2010). • Credit ratings reflect increasing size of “too‐big‐to‐fail” subsidy. • Value of the subsidies is substantial.
Value of the subsidies is substantial
– Ex ante: subsidized borrowing rates.
– Ex post: cost of bailouts, resolution of failed institutions. Consequences of Safety Net • Many distortions, especially when guarantees are underpriced:
– Incentives/ability to grow inefficiently due to subsidized funding.
– Incentives to evade capital regulation
regulation.
– Excessive risk taking.
• Does this system make sense? NO! Highly distortive and
paradoxical.
• Even if subsidyy is p
passed to borrowers, delivering
g subsidy
y through
g
leverage is bad policy; subsidies must be questioned.
– If Goldman invests in Facebook or JPM in Twitter, who is
subsidized and why?
y
– Systemic risk = negative externality.
– Excessive risk taking.
• Impossible/undesirable for government to commit not to bail out.
• Difficult to price guarantees, moral hazard remains a problem.
• Best approach: MUCH MORE EQUITY!!!
Lost Subsidies are not a Social Cost!!
• Analogy: leverage = pollution; creates negative externalities.
– Bank high leverage generates fragility and systemic risk
risk, may
lead to crisis and bailouts.
• Suppose public policy subsidized polluters; the more pollution,
the higher the subsidy.
– The more leverage, the more banks benefit from subsidies.
• Unless subsidies are made up, forcing reduction in pollution
would remove subsidies and thus increase production costs.
• Should pollution/leverage be allowed to keep prices low?
– Taxpayers can save on subsidies and lower pollution.
– Key: is there a clean and inexpensive alternative?
• Is high
g leverage
g and fragility
g y an essential part
p
of
banking, and should it therefore be tolerated, even
subsidized?
Answer: NO! High bank leverage is g
g
an unnecessary evil!
• High leverage is not inherent to banking.
• High banks leverage entails a large social cost and virtually no social benefit. • While some bank debt (e.g., deposits) is part of “the business of banking” and t f “th b i
f b ki ” d
creates value, this does not imply high leverage. • Adding
Adding equity is not
equity is not socially expensive; socially expensive;
actually, it is “a bargain.”
Balance Sheet Fallacies
Balance Sheet Fallacies
• Increased
Increased Capital Requirements need NOT
Capital Requirements need NOT force force
banks to reduce lending or deposit taking.
Initial Balance Sheet
((10% Capital)
p )
Revised Balance Sheet with Increased Capital Requirements
((20% Capital)
p )
New Assets: 12.5
Equity: 10
Loans: 100
Equity: 22.5
Equity: 20
Loans: 100
Deposits & Other Liabilities: 90
Equity: 10
Loans: 50
Deposits & Other Liabilities: 80
Loans: 100
Deposits & Other Liabilities: 90
Deposits & Other Liabilities: 40
A A t Li id ti
A: Asset Liquidation
B R
B: Recapitalization
it li ti
C A tE
C: Asset Expansion
i
19
Fallacious Claims and ROE Fixation
“Banks… do not want to hold too much capital because by so doing they will lower the
returns to equity holders.” Mishkin and Aekin.
“Demands
Demands for Tier-1
Tier 1 capital ratio of 20%...
20% could depress ROE to levels that make
investment into the banking sector unattractive relative to other business sectors.” Josef
Ackermann.
• Except for subsidies, ROE does not measure value!!
• Average ROE reflects sensitivity of earnings to asset value
(riskiness of equity returns), which increases with leverage.
• Higher leverage mechanically increases ROE whether value
is created or not because required return on equity is higher. • S
Shareholders can increase risk and average ROE
O on their
own by buying shares on margin. • ROE fixation reflects love of leverage. Higher Leverage Makes Equity More Sensitive to Asset Risk
Sensitive to Asset Risk
25%
Initial 10% Capital
20%
Recapitalization to
20% Capital
15%
10%
ROE
(Earnings Yield)
5%
0%
3.0%
‐5%
3.5%
4.0%
4.5%
5.0%
5.5%
10%
‐10%
‐15%
Return on Assets
(before interest expenses)
(before interest expenses)
6.0%
6.5%
7.0%
Return on Equity for UK Banks (Haldane, 2009)
ROE increases explained by increase in leverage and risk
ROE increases explained by increase in leverage and risk
22
Fallacious Claim: “Equity is expensive because it h
has a high required return.”
hi h
i d
”
• Risk is priced in the market; the higher the Risk is priced in the market; the higher the
risk, the higher the required return.
• Less leverage lowers the required return on equity (and possibly on debt) because equity
equity (and possibly on debt) because equity (and possibly debt) becomes less risky.
• Redistributing risk among providers of funds does not affect overall funding costs unless it
does not affect overall funding costs unless it affects the total cash available to them, which can only occur through effect on “frictions
can only occur through effect on frictions.”
M&M and Banking, a 50+ years Debate
• Modigliani and Miller’s result does NOT imply that
banks are irrelevant. • Capital structure is not irrelevant for any firm. • Denying the M&M insight is akin to denying gravity.
• In a well functioning market, the cost of equity
cannot be constant as leverage
g changes
g .
• The impact
p
of a change
g in funding
g mix must be
examined through its effect on frictions, i.e., how the
funding mix changes the total cash available. This
principle applies to banks and non-banks. Funding in the Non‐Financial World g
• No capital regulation! Firms make their own decisions based on private costs and benefits
decisions based on private costs and benefits. • Some considerations:
– Debt has a tax advantage: firm can often pay less taxes if it pays funding providers interest instead of dividend and capital gains. – Debt increases risk of bankruptcy/default, p y
,
which leads to “deadweight costs” (legal expenses, interruptions, etc.).
– Debt creates conflicts of interest (“agency costs”) that lead to sub‐optimal investment decisions, e.g., excessive risk‐taking, debt overhang (underinvestment).
Funding in the Non‐Financial World g
• Bankruptcy and agency costs of debt can increase borrowing costs
increase borrowing costs. • Debt Covenants protect creditors by p
y
constraining what equity/managers can do. – Example: restrict dividends and more borrowing constrain investments
borrowing, constrain investments. • Tradeoffs between debt and equity d
determine funding mix. i f di
i
• On average 70% of funding for public On average 70% of funding for public
firms is through equity. Funding Considerations for Banks
Funding Considerations for Banks • Deposits and other “money‐like” instruments are “cheap” because they provide liquidity to creditors. • Tax code favors any form of debt. y
• When liabilities are part of a subsidized safety net (underpriced guarantees), borrowing costs are low
(underpriced guarantees), borrowing costs are low and do not reflect the riskiness of the assets.
• Deadweight bankruptcy costs are borne by Deadweight bankruptcy costs are borne by
governments.
• No tradeoffs!! The ideal balance sheet is No tradeoffs!! The ideal balance sheet is “all
all debt.
debt ” This maximizes ROE as well. – Note: Note: “all
all debt
debt” is the same as is the same as “all
all equity,
equity ” except if except if
debt is guaranteed by third party. The “Informational Insensitivity” of Debt Does NOT Necessitate High Leverage
h
• The
The more highly leveraged the bank, the less more highly leveraged the bank the less
“informationally sensitive” debt is. • As leverage increases, or in distress, information y
g
insensitivity no longer holds, runs can occur.
• The growth of the shadow banking system does not prove that all the manufactured debt was
not prove that all the manufactured debt was socially valuable. • Banks can continue providing liquidity, indeed qu d ty
be e a ced, t ey add equ ty
liquidity will be enhanced, if they add equity.
• Additional equity need not crowd out deposits. Balance Sheet Changes and End Investors
Mutual
Funds
A
Equity
C
Bankingg
Sector
Assets
All the Assets
All
th A t
In the Economy
•
•
B
Investors
B
Deposits
And
Other
“Liquid”
Debt
Banking Sector
Mutual
Funds
A
Investors
Equity
C
All the Assets
All
th A t
In the Economy
Banking
Sector
Assets
Deposits
And
Other
“Liquid”
Debt
Banking Sector
If banks buy marketable securities, those are still held by final investors;
ba s buy a e ab e secu es, ose a e s
e d by a
es o s;
productive opportunities and portfolios need not change. Governance problems can be solved without relying on leverage and fragility. Does Debt Provide “Market
Does Debt Provide Market Discipline?
Discipline?”
“Debt is valuable in a bank’s capital structure because it provides an important disciplining force for management.” id
i
t t di i li i f
f
t”
(Squam Lake, 2009) • Assessment: Myth; inadequate models with no support. Assessment: Myth; inadequate models with no support
– Creditors protected by safety net do not invest in monitoring, do not bother with covenants, etc. Threat of default not credible.
not bother with covenants, etc. Threat of default not credible. – High leverage of any form, even subordinated debt, exacerbates
incentives for excessive risk taking.
– Equity has stronger incentives than debt to monitor against waste of assets or poor effort. – No empirical evidence. Last decade contradicts these claims. N
i i l id
L td d
t di t th
l i
Crisis shows this does not work, has not worked! • Even
Even if… mechanism relies on fragility, very costly; is debt if mechanism relies on fragility very costly; is debt
unique or best way to discipline or are there alternatives? Does Debt Control “Free
Does Debt Control Free Cash Flow
Cash Flow”??
• Jensen 1986 suggests debt prevents waste of cash flows by managers
flows by managers. – Does high leverage uniquely solve this problem?
– Can consider other ways to provide governance. – Admati & Pfleiderer 2010: Equity Liability Carrier
q y
y
Increased
Equity
L. Equity
Risky
Assets
FI
Equity
Liabilities
with recourse to ELC
ELC
Equity
Safe
Assets
ELC
31
Can Debt Help Limit Excessive Risk?
• This is paradoxical, as leverage increases incentives
toward risk taking.
taking
• Calomiris (1999): Junior debt holders monitor & “run”
if risk
i k increases;
i
notion
ti off discipline
di i li motivates
ti t Ti
Tier 2.
2
Deposits
•
•
•
•
Junior Debt
Equity
Equity
Even with such debt,, a larger
g equity
q y cushion will help
p
Fragility of debt  subject to inefficient, costly runs
Potential discipline undermined by guarantees.
Where was the discipline prior to 2008?
32
Does Observe High Leverage of Banks Imply High Leverage is “Optimal?” • Certainly not socially! Given incentives from taxes and implicit guarantees, privately optimal leverage is excessive from social perspective. • Except
Except for subsidies, high leverage may not even be for subsidies high leverage may not even be
privately optimal for banks, if viewed ex ante (assuming it was possible to make commitments to
(assuming it was possible to make commitments to future investment and financing decisions). – However, once highly leveraged, banks have strong h hl l
d b k h
incentives to remain highly leveraged and try to “dilute” existing creditors; this leads to distorted investment
existing creditors; this leads to distorted investment decisions and ex ante loss of value.
Under Pricing & Issuance Costs
Under‐Pricing & Issuance Costs
• Debt is less subject to under-pricing (Myers-Majluf (1984)
– True, but this does NOT imply high leverage is optimal
– Lower leverage 
• Greater ability to rely on retained earnings
• Equity is less sensitive so any underpricing is less severe
• Easily mitigated
– Restrict payouts (dividends and share repurchases)
– Rights offerings: low cost & removes underpricing
concern
– Remove discretion: mitigate negative inferences
(force issuance if capital falls too low or risk increases)
34
More Equity Has Positive Side Benefits
• High leverage generates many distortions in l di /i
lending/investment decisions by bank managers, working t
td i i
b b k
ki
on behalf of shareholders.
– Excessive risk taking: heads we win, tails debt holders or government loses.
– Debt overhang: good opportunities are passed up because new funding would benefit existing creditors. • Key factor in credit freezes in crisis.
• A reason highly leveraged banks might respond to higher equity requirement by shrinking.
it
i
t b h i ki
• A problem that is alleviated with better capitalization. • Lower leverage has benefits beyond reducing systemic risk!
Private “Benefits” of Equity and (non‐demand‐deposit) Debt
1
3
2
DEBT
1. Tax advantages make it cheap
2. Implicit guarantees make it cheap
3 ROE fixation
3.
ROE fixation
EQUITY
SOCIAL Benefits of Equity and (non‐demand‐deposit) Debt
2
DEBT
1. Tax advantages make it cheap
2. Implicit guarantees make it cheap
3 ROE fixation
3.
ROE fixation
1
3
EQUITY
1. Reduces systemic risk
2. Reduces incentives for excessive risk taking
excessive risk‐taking
3. Reduces deadweight costs
associated with bailouts
Equity Requirements vs “Bailout
Equity Requirements vs. Bailout Fund
Fund”
• It
It is impossible, even undesirable, to commit is impossible even undesirable to commit
never to bail out (Dodd Frank tries).
• It is difficult if not impossible to price implicit guarantees correctly on an ongoing basis.
guarantees correctly on an ongoing basis. • Guarantees always encourages excessive risk t ki
taking.
• Adding equity is akin to requiring “self g q y
q
g
insurance” by banks at market prices.
Equity vs. Contingent Capital
or “Bail‐In” Mechanisms
“ l ”
h
• Contingent capital and bail‐in proposals attempt to g
p
p p
p
transform debt into equity “just when needed.”
• Complicated to design and value!
Complicated to design and value!
– What is the trigger? Who pulls it? Will it work as intended?
– Manipulation issues; political pressures around trigger event, destabilizing approaching a crisis. • Is contingent capital “cheaper” than equity?
–
–
–
–
No!!! False comparison to debt, dominated by equity.
p
y q y
No (social) value to the debt‐like feature of security. Seems motivated by tax and maintaining high “ROE
Seems motivated by tax and maintaining high ROE.”
Equity is simplest and best cushion. No need for contortions.
Contingent Capital as a Cushion
Contingent Capital as a Cushion
Extra Cushion
Debt‐like
Contingent
g
Capital
Old Capital R
Requirement
i
Equity
Capital
A Question: Why does the security start as debt?
Extra Cushion
Debt‐like
More
Contingent
g
Equity
Capital
Old Capital R
Requirement
i
Equity
Capital
WHY NOT
simply increasing
Equity instead?
Capital Requirements and Lending
p
q
g
• Claims often made that increased capital requirements would lead to a credit crunch
requirements would lead to a credit crunch.
• Remember: biggest credit crunch (freezing of markets in the crisis) was due to excessive g
p
the problem.
p
leverage! “Too much capital” was not
• Compare a bank with 5% equity to a bank with 25% equity The latter better capitalized bank
25% equity. The latter, better capitalized bank makes better lending decisions.
– It is less likely to pass up profitable loans because of difficulty funding them (due to “debt overhang”).
– It is less likely to over‐invest in excessively risky loans.
Might There be Lending Contraction if Capital Requirements are Raised?
l
d
• Not
Not clear. (Compare option expensing debate.)
clear (Compare option expensing debate )
• Possible reasons for contractions:
– Problematic risk weighing system. – If funding costs increase due to lost subsidies, some g
,
loans might no longer be profitable at margin.
– Existing leverage levels may be excessive and Existing leverage levels may be excessive and
hamper capital raising because of “debt overhang.”
– Equity issuance or dividend withholding carry negative “stigma” when managers are strategic and possibly base decisions on private information. What about the Unregulated Shadows?
What about the Unregulated Shadows?
• Many
Many of the shadow banking entities are sponsored of the shadow banking entities are sponsored
by regulated banks, who provide guarantees. – Hedge funds are less highly leveraged.
Hedge funds are less highly leveraged
• Much of the “financial innovation” in recent decade was motivated by “regulatory arbitrage,” to avoid capital requirements (and deposit insurance fees).
p
q
(
p
)
• Regulators could have intervened and should do so i h f
in the future.
• Determining
Determining the set of regulated activities/entities the set of regulated activities/entities
on a continual basis will always be a challenge. What about Competitiveness (“Level Playing Field”)?
• Implicit identification of national interests with the competitive successes of the country’ss financial competitive successes of the country
financial
institutions is unwarranted if taxpayers are providing y
the safety net. – The Irish taxpayer would have been better off if Irish financial institutions were less successful in the markets for funds and for providing loans for Irish real estate developments. – The German taxpayer would have been better off if the shadow banks of the German Landesbanken had been less successful in acquiring ABS and issuing ABCP
successful in acquiring ABS and issuing ABCP. – The Swiss taxpayer would have been better off if UBS Investment Bank had been less successful in re‐securitizing
Investment Bank had been less successful in re
securitizing low‐grade subprime mortgage backed securities. Summary and Policy Recommendations • Require significantly more equity financing for anyone involved in credit generation.
• Ratios significantly higher than 10% of un
Ratios significantly higher than 10% of un‐
weighted assets should be seriously considered.
– Benchmark: REIT fund with 30% equity.
B h
k REIT f d ith 30%
it
• Requirements should not be one “number,” or they cannot work as a cushion. – Concept of buffers set up in Basel III is sensible;
Concept of buffers set up in Basel III is sensible;
• Risk weights are very problematic. Work on alternatives.
l
i
Policy Recommendations continued
Policy Recommendations, continued • Regulators
Regulators should control equity payouts and should control equity payouts and
issuance.
• Immediate recommendation for quick and efficient transition: ban equity payouts such as
efficient transition: ban equity payouts such as dividends for all banks until banks are better capitalized; possibly mandate equity issuance.
it li d
ibl
d t
it i
– This would eliminate negative inference on a given This would eliminate negative inference on a given
bank that might be otherwise associated with these actions (Recall TARP initiation in U S that gave banks
actions. (Recall TARP initiation in U.S that gave banks little choice but to accept the funds.) Final Observations
• Public policy should not encourage bank leverage.
• Subsidies are highly distortive. – Tax code is straightforward conceptually. – Guarantees are very tricky to remove (or price).
Guarantees are very tricky to remove (or price)
– Higher equity requirements are the best approach to i
increasing stability, removing distortions such as i
t bilit
i di t ti
h
excessive risk, and reducing subsidies.
• International harmonization – Very important for resolution mechanisms.
V i
t tf
l ti
h i
– Desirable but not essential for capital regulation.