Explain the main features of how financial institutions are regulated

The Basel framework sets the core bank rules. Capital is measured against risk-weighted assets: common equity Tier 1 of at least 4.5%, Tier 1 of at least 6% and total capital of at least 8%, with a conservation buffer on top. Liquidity rules add the liquidity coverage ratio, high-quality liquid assets divided by net cash outflows over a 30-day stress period, and the net stable funding ratio, available stable funding divided by required stable funding; both must be at least 100%. Regulators also promote market discipline through disclosure requirements, and insurers face solvency regimes built on risk-based capital. The trap is measuring capital against total assets rather than risk-weighted assets, which ignores how risky those assets are.