The Evolving Complexity of Capital Regulation

This article traces the growing complexity of capital regulation with emphasis on decisions of the Basel Committee on Banking Supervision and bank regulators in the US. The pattern is one of increasingly complex regulations as each round of reform attempts to correct perceived weaknesses in the earlier regime. The outcome is a regulatory framework that is remarkably opaque, costly to monitor and enforce, and imposes heavy compliance costs on the regulatees, which are inevitably passed on in part to users of financial services. After a discussion of the most recent round of reforms, the article presents a table organized by five different regulatory capital numerators and five different denominators that define thirtynine different regulatory capital requirements, which Globally Significant US banks must meet. This way of organizing the various capital requirements shows how the number of capital ratios could be reduced by 75% with no loss of rigor. The conclusion speculates about why regulatory simplification seems so much more difficult to accomplish in the US than in other countries with much longer regulatory traditions.