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On the Feasibility of Risk Based Regulation

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  • Jón Daníelson

Abstract

Risk based regulation has emerged as the primary ingredient in the Basel-II proposals, where a bank capital is to become a direct function of a bank's riskiness. While the notion that bank capital be risk sensitive is intuitively appealing, the actual implementation, in the form of Basel-II, carries with it a host of potentially perverse side effects. Basel-II may increase financial risk, both for individual institutions and the entire banking system, and hence promote financial instability. This can happen, e.g., due to the endogenous nature of risk (JEL G2)

Suggested Citation

  • Jón Daníelson, 2003. "On the Feasibility of Risk Based Regulation," CESifo Economic Studies, CESifo, vol. 49(2), pages 157-179.
  • Handle: RePEc:oup:cesifo:v:49:y:2003:i:2:p:157-179.
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    File URL: http://hdl.handle.net/10.1093/cesifo/49.2.157
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    Citations

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    Cited by:

    1. Cotter, John & Blake, David & Dowd, Kevin, 2006. "Financial Risks and the Pension Protection Fund: Can it Survive Them?," MPRA Paper 3498, University Library of Munich, Germany.
    2. Edgardo Barandiarán, 2003. "El Prestamista de Última Instancia en la Nueva Industria Bancaria," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 40(120), pages 337-358.
    3. Yilmaz, Ensar, 2009. "Capital accumulation and regulation," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(3), pages 760-771, August.
    4. Keppo, Jussi & Kofman, Leonard & Meng, Xu, 2010. "Unintended consequences of the market risk requirement in banking regulation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 2192-2214, October.
    5. Júlia Király & Márton Nagy & Viktor E. Szabó, 2008. "Contagion and the beginning of the crisis – pre-Lehman period," MNB Occasional Papers 2008/76, Magyar Nemzeti Bank (Central Bank of Hungary).
    6. Power, Michael & Ashby, Simon & Palermo, Tommaso, 2013. "Risk culture in financial organisations: a research report," LSE Research Online Documents on Economics 67978, London School of Economics and Political Science, LSE Library.

    More about this item

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services

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