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Capital Regulation after the Crisis: Business as Usual?

  • Martin Hellwig

The 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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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_DICE_Report/zs-dice-2010/zs-dice-2010-2/dicereport210-rr1.pdf
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Article provided by Ifo Institute for Economic Research at the University of Munich in its journal DICE.

Volume (Year): 8 (2010)
Issue (Month): 2 (07)
Pages: 40-46

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Handle: RePEc:ces:ifodic:v:8:y:2010:i:2:p:40-46
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  1. Acharya, Viral V & Schnabl, Philipp & Suarez, Gustavo, 2012. "Securitization Without Risk Transfer," CEPR Discussion Papers 8769, C.E.P.R. Discussion Papers.
  2. Martin Hellwig & Markus Straub, 1996. "Capital Requirements for Market Risks Based on Inhouse Models - Aspects of Quality Assessment," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 755-776, December.
  3. Martin Hellwig, 2008. "Systemic Risk in the Financial Sector: An Analysis of the Subprime-Mortgage Financial Crisis," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2008_43, Max Planck Institute for Research on Collective Goods.
  4. Blum, Jurg, 1999. "Do capital adequacy requirements reduce risks in banking?," Journal of Banking & Finance, Elsevier, vol. 23(5), pages 755-771, May.
  5. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December.
  6. Martin Hellwig, 1996. "Capital Adequacy Rules as Instruments for the Regulation of Banks," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 132(IV), pages 609-612, December.
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