So here we're being asked, "Calculate the minimum Basel III capital ratios on the following banks. Why do some banks have higher capital requirements than others?" The three banks we're looking at here is big bank, risky bank, and simple bank. Right, first thing we gotta do is figure out the total risk weighted assets here. And those are of course going to be the risk weighted assets for credit risk, the risk weighted assets for operational risk, and risk weighted assets for market risk. And under Basel III, we do this in a very similar way to Basel II. So sum all of those up for all three banks in order to get our total risk weighted assets for all those three banks. And we can of course see that simple bank here is a lot smaller, risky bank, medium size, and big bank looks really big. And then we look at the capital ratios and they've all been assigned a minimum total capital ratio of 8%. That's the same for all banks. And that's total capital ratio. So that's tier one capital as well as tier two capital. But on top of that, Basel III is asking for extra buffers. First of all, there's a capital conservation buffer and that applies to all banks. If you're not above that buffer, there might be a limit to your dividends, share buybacks and bonuses. And let's have a look. They all have the same 2.5% capital conservation buffer. No surprise, of course, that should be the same. On top of that, local bank regulators are assigning an anti-cyclical capital buffer. So in times of unusually high credit buildup, they will add an extra anti-cyclical capital buffer, and that's done locally. We can see that big bank has had a fair bit of credit growth, so the local regulator has assigned 1.5% extra in anti-cyclical capital buffer. The risky bank has had a lot of credit buildup and it's been put the full 2.5% anti-cyclical capital buffer, while the simple bank only has half a percent. And then finally, what about the systemically important financial institutions buffer? Well, big bank has been deemed to be a systemically important financial institution and therefore, has been assigned an additional 2.5% buffer. Risky bank and simple bank does not suffer from this additional buffer because they are not deemed to be systemically important financial institutions. So we add all of these up and we see that big bank needs a total capital of 14.5, risky bank, 13%, and simple bank only 11%.

And therefore, the total capital that each of these banks require, how do we back it out? Well, of course, we just take the total capital ratio times the total risk weighted assets and we see that big bank needs to hold 188.5 of total capital, risky bank, 91, and simple bank 25.3. So, in essence here, what's going on, the banks that have a high credit buildup, they get a anti-cyclical capital buffer depending on how rapidly credit has been increasing. And the systemically important financial institution here gets an extra buffer, in this case, all the way to 2.5%.