This CEPS Commentary finds that banking supervisors and regulators attach too much importance to the current capital ratios, despite the multi-indicators approach encouraged by Basel III. Drawing on the recent experience of the Belgian-French bank Dexia, the author shows that reliance on this single capital indicator can be very costly. A month before the announcement of the €94 billion rescue package on October 10th, the Belgian-French bank stressed that it still had a solid capital reserve and quoted regulatory capital ratios at the end of June that were well above the legal standards. The paper explores why this seemingly sound bank failed and why did the EBA stress tests fail to signal Dexia’s problems?
Willem Pieter de Groen is a Research Assistant in the Financial Institutions and Prudential Policy research unit at CEPS.