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Ratio controls need reconsideration

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  • Goodhart, Charles

Abstract

Bank equity capital can play several roles; for example as a buffer against (unexpected) loss, as protection for other creditors in bankruptcy, and as ‘skin in the game’. There was never sufficient discussion of which role(s) the BCBS capital adequacy requirements (CARs) were meant to play, and whether they did so satisfactorily. In practice they did not. I discuss what principles should lie behind CARs if we could design these from scratch. I argue that there should be a minimum intervention point triggering official action to depose management and shareholders, and then move to resolution, with an increasingly penal ladder of sanctions as equity capital falls towards this point. A similar approach should also be applied to liquidity requirements.

Suggested Citation

  • Goodhart, Charles, 2013. "Ratio controls need reconsideration," Journal of Financial Stability, Elsevier, vol. 9(3), pages 445-450.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:445-450
    DOI: 10.1016/j.jfs.2013.02.001
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    References listed on IDEAS

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    Cited by:

    1. Farmer, J Doyne & Kleinnijenhuis, Alissa M & Nahai-Williamson, Paul & Wetzer, Thom, 2020. "Foundations of system-wide financial stress testing with heterogeneous institutions," Bank of England working papers 861, Bank of England.
    2. Louhichi, Awatef & Boujelbene, Younes, 2017. "Bank capital, lending and financing behaviour of dual banking systems," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 61-79.
    3. Wiersema, Garbrand & Kleinnijenhuis, Alissa M. & Wetzer, Thom & Farmer, J. Doyne, 2023. "Scenario-free analysis of financial stability with interacting contagion channels," Journal of Banking & Finance, Elsevier, vol. 146(C).
    4. Christina Bui, 2018. "Bank Regulation and Financial Stability," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2018, January-A.
    5. Chernykh, Lucy & Cole, Rebel A., 2015. "How should we measure bank capital adequacy for triggering Prompt Corrective Action? A (simple) proposal," Journal of Financial Stability, Elsevier, vol. 20(C), pages 131-143.
    6. Li, Boyao, 2017. "The impact of the Basel III liquidity coverage ratio on macroeconomic stability: An agent-based approach," Economics Discussion Papers 2017-2, Kiel Institute for the World Economy (IfW Kiel).
    7. Košak, Marko & Li, Shaofang & Lončarski, Igor & Marinč, Matej, 2015. "Quality of bank capital and bank lending behavior during the global financial crisis," International Review of Financial Analysis, Elsevier, vol. 37(C), pages 168-183.
    8. Bui, Christina & Scheule, Harald & Wu, Eliza, 2017. "The value of bank capital buffers in maintaining financial system resilience," Journal of Financial Stability, Elsevier, vol. 33(C), pages 23-40.
    9. Shaofang Li, 2021. "Quality of Bank Capital, Competition, and Risk-Taking: Some International Evidence," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 57(12), pages 3455-3488, September.
    10. Micossi,Stefano, 2013. "A Viable Alternative to Basel III Prudential Capital Rules," CEPS Papers 8075, Centre for European Policy Studies.
    11. Matej Marinč & Mojmir Mrak & Vasja Rant, 2014. "Dimensions of Bank Capital Regulation: A Cross-Country Analysis," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 61(4), pages 415-439, September.

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    More about this item

    Keywords

    Bank equity; Capital adequacy requirements; Ladder of sanctions; Bank liquidity;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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