Market-Based Bank Capital Regulation
AbstractToday’s regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is “ERNs” (equity recourse notes--superficially similar to, but importantly distinct from, “cocos”) which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being “right”.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9618.
Date of creation: Aug 2013
Date of revision:
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Other versions of this item:
- Jeremy Bulow & Paul Klemperer, 2013. "Market-Based Bank Capital Regulation," Economics Papers 2013-W12, Economics Group, Nuffield College, University of Oxford.
- Bulow, Jeremy & Klemperer, Paul, 2013. "Market-Based Bank Capital Regulation," Research Papers 2132, Stanford University, Graduate School of Business.
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-09-24 (All new papers)
- NEP-BAN-2013-09-24 (Banking)
- NEP-CBA-2013-09-24 (Central Banking)
- NEP-IAS-2013-09-24 (Insurance Economics)
- NEP-RMG-2013-09-24 (Risk Management)
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