Capital Regulation after the Crisis: Business as Usual?
AbstractThe paper discusses the reform of capital regulation of banks in the wake of the financial crisis of 2007/2009. Whereas the Basel Committee on Banking Supervision seems to go for marginal changes here and there, the paper calls for a thorough overhaul, moving away from risk calibration and raising capital requirements very substantially. The argument is based on the observation that the current system of risk-calibrated capital requirements, in particular under the model-based approach, played a key role in allowing banks to be undercapitalized prior to the crisis, with strong systemic effects for deleveraging multipliers and for the functioning of interbank markets. The argument is also based on the observation that the current system has no theoretical foundation, its objectives are ill-specified, and its effects have not been thought through, either for the individual bank or for the system as a whole. Objections to substantial increases in capital requirements rest on arguments that run counter to economic logic or are themselves evidence of moral hazard and a need for regulation.
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Bibliographic InfoPaper provided by Max Planck Institute for Research on Collective Goods in its series Working Paper Series of the Max Planck Institute for Research on Collective Goods with number 2010_31.
Date of creation: Aug 2010
Date of revision:
financial crisis; Basel Accord; banking regulation; capital requirements; modelbased approach; systemic risk;
Other versions of this item:
- Martin Hellwig, 2010. "Capital Regulation after the Crisis: Business as Usual?," CESifo DICE Report, Ifo Institute for Economic Research at the University of Munich, vol. 8(2), pages 40-46, 07.
- Hellwig, Martin, 2010. "Capital Regulation after the Crisis: Business as Usual?," Working paper 633, Regulation2point0.
- G01 - Financial Economics - - General - - - Financial Crises
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-09-03 (All new papers)
- NEP-BAN-2010-09-03 (Banking)
- NEP-BEC-2010-09-03 (Business Economics)
- NEP-PKE-2010-09-03 (Post Keynesian Economics)
- NEP-REG-2010-09-03 (Regulation)
- NEP-RMG-2010-09-03 (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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Working Paper Series of the Max Planck Institute for Research on Collective Goods
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