A Viable Alternative to Basel III Prudential Capital Rules
AbstractStefano Micossi argues in this paper that the Basel framework for bank prudential requirements is deeply flawed and that the Basel III revision has failed to correct these flaws, making the system even more complicated, opaque and open to manipulation. In practice, he finds that the present system does not offer regulators and financial markets a reliable capital standard for banks and its divergent implementation in the main jurisdictions of the European Union and the United States has broken the market into special fiefdoms governed by national regulators in response to untoward special interests. The time is ripe to stop tinkering with minor adjustment and revisions in order to rescue the system, because the system cannot be rescued. In response to the current situation, Micossi calls for abandoning reference to risk-weighted assets calculated by banks with their internal risk management models for the determination of banks’ prudential capital, together with the preoccupation with the asset side of banks in correcting for risk exposure. He suggests that the alternative may be provided by a combination of a straight capital ratio and a properly designed deposit insurance system. It is a logical, complete and much less distortive alternative; it would serve better the cause of financial stability as well as the interest of the banks in clear, transparent and level playing field.
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Bibliographic InfoPaper provided by Centre for European Policy Studies in its series CEPS Papers with number 8075.
Length: 8 pages
Date of creation: May 2013
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-06-16 (All new papers)
- NEP-BAN-2013-06-16 (Banking)
- NEP-CBA-2013-06-16 (Central Banking)
- NEP-RMG-2013-06-16 (Risk Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Hellwig, Martin, 2010.
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- Goodhart, Charles, 2013. "Ratio controls need reconsideration," Journal of Financial Stability, Elsevier, vol. 9(3), pages 445-450.
- Carmassi, Jacopo & Micossi, Stefano, 2012. "Time to Set Banking Regulation Right," CEPS Papers 6734, Centre for European Policy Studies.
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