A column in the Wall Street Journal by the governor of the central bank of Sweden discussing the Basel accord makes the following observation: “One clear lesson from the [financial] crisis is that regulatory capital requirements for the banking system were too low. In other words, leverage was too high.”
a. What are “regulatory capital requirements”?
b. Why would regulatory capital requirements being too low result in leverage being too high?
c. What does leverage being too high have to do with the financial crisis?