One of the ways in which a countercyclical element could be introduced into regulatory capital requirements is to make required capital a function of the change in assets—not just of the risk-weighted level; see Charles Goodhart and Avinash Persaud, “How to Avoid the Next Crash,” Financial Times, January 30, 2008. The Basel Committee has recently announced that it will increase capital charges for complex, structured credit products, liquidity facilities to support asset-backed commercial-paper conduits, and credit exposures held in the trading book. While this is welcome, what is needed goes much beyond that; in particular, we need a significant increase.
