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The Future of Regulatory Capital: General Principles and Specific Proposals

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  • Arturo Estrella

Abstract

There is a risk of an increasing disconnect between regulatory capital and what banks and other financial institutions do. The last few decades have brought tremendous changes in the nature of financial firms, their activities, and their approaches to risk management. In such an environment, past regulatory achievements provide no guarantee of future success. This paper argues for increased reliance on informed supervision of compliance with sound practices. Mechanical formulas may play a role in regulation, but they are in general incapable of providing a solution to the question of how much capital a bank should have. The paper concludes by applying these general principles to examine a series of specific new approaches to regulatory capital that are currently being discussed.

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Bibliographic Info

Article provided by Swiss Society of Economics and Statistics (SSES) in its journal Swiss Journal of Economics and Statistics.

Volume (Year): 134 (1998)
Issue (Month): IV (December)
Pages: 599-616

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Handle: RePEc:ses:arsjes:1998-iv-9

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  1. Arturo Estrella, 1995. "A prolegomenon to future capital requirements," Economic Policy Review, Federal Reserve Bank of New York, issue Jul, pages 1-12.
  2. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  3. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
  4. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  5. H. Peyton Young, 1996. "The Economics of Convention," Journal of Economic Perspectives, American Economic Association, vol. 10(2), pages 105-122, Spring.
  6. Miller, Merton H., 1995. "Do the M & M propositions apply to banks?," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 483-489, June.
  7. Davis, E. Philip, 1995. "Debt, Financial Fragility, and Systemic Risk," OUP Catalogue, Oxford University Press, number 9780198233312, September.
  8. Frederic S. Mishkin, 1990. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Working Papers 3400, National Bureau of Economic Research, Inc.
  9. Caplin, Andrew & Nalebuff, Barry, 1997. "Competition among Institutions," Journal of Economic Theory, Elsevier, vol. 72(2), pages 306-342, February.
  10. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  11. North, Douglass C. & Weingast, Barry R., 1989. "Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England," The Journal of Economic History, Cambridge University Press, vol. 49(04), pages 803-832, December.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
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Cited by:
  1. Ernst Baltensperger, 1998. "The Question of Bank Capital Regulation," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 134(IV), pages 645-648, December.

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