Regulators have traditionally required banks to maintain capital$-$asset ratios of a certain level to ensure adequate net worth based on the size and composition of the bank's assets on its balance sheet. Why might such capital adequacy requirements not be effective?

Banks never learn ways to evade existing capital requirements.

A bank's capital does not affect its net worth.

The importance of off$-$balance sheet activities has been increasing and the nature of these activities facilitates a high level of risk taking by banks that is not apparent from the institution's balance sheet. $$ Banks never develop strategies, such as holding highly$-$rated mortgage$-$backed securities$,$ to lower their risk$-$weighted capital requirements.