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Financial Market Regulation in Germany - Capital Requirements of Financial Institutions

  • Daniel Detzer

    (Berlin School of Economics and Law, and Institute for International Political Economy Berlin (IPE))

This paper examines capital adequacy regulation in Germany. After a general overview of financial regulation in Germany, the paper focuses on the most important development in the area of capital adequacy regulation from the 1930s up to the financial crisis. Two main trends are identified: a gradual softening of the eligibility criteria for regulatory equity and the increasing reliance on banks’ internal risk models for the determination of risk weights. The first trend has been reversed with the regulatory reforms following the financial crisis. Internal risk models still play a central role. The rest of the paper focuses on the problems with the use of internal risk models for regulatory purposes. The discussion includes the moral hazard problem, the technical problems with the models, the difference between economically and socially optimal capital requirements, the procyclicality of the models and the problem occurring due to the existence of fundamental uncertainty. The regulatory reforms due to Basel 2.5 and Basel III and their potential to alleviate the identified problems are then examined. It is concluded that those cannot solve the most relevant problems and that currently the use of models for financial regulation is problematic. Finally, some suggestions of how the problems could be addressed are given.

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File URL: http://fessud.eu/wp-content/uploads/2013/04/FESSUD_Working-Paper-Capital-Requirements-working-paper-26.pdf
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Paper provided by Financialisation, Economy, Society & Sustainable Development (FESSUD) Project in its series Working papers with number wpaper26.

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Length: 45 pages
Date of creation: 15 Feb 2014
Date of revision:
Handle: RePEc:fes:wpaper:wpaper26
Contact details of provider: Postal: FESSUD Co-ordinator (Malcolm Sawyer) Leeds University Business School Maurice Keyworth Buidling Leeds LS2 9JT

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