Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/57491 
Authors: 
Year of Publication: 
2010
Series/Report no.: 
Preprints of the Max Planck Institute for Research on Collective Goods No. 2010,31
Publisher: 
Max Planck Institute for Research on Collective Goods, Bonn
Abstract: 
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.
Subjects: 
financial crisis
Basel Accord
banking regulation
capital requirements
modelbased approach
systemic risk
JEL: 
G01
G21
G28
Document Type: 
Working Paper

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