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The Missed Opportunity and Challenge of Capital Regulation

Published online by Cambridge University Press:  01 January 2020

Anat R. Admati
Anat R. Admati*
Affiliation:
Graduate School of Business, Stanford University
*
E-mail: [email protected]
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Abstract

Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, a complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.

Keywords

Banking regulationcapital regulationsbankingequity in bankingcapital structureleverageagency costsleverage ratchet effectBaselrisk weightsTLACG21G28G32G38H81K23
Type
Research Articles
Information
National Institute Economic Review , Volume 235 , February 2016 , pp. R4 - R14
Copyright
Copyright © 2016 National Institute of Economic and Social Research

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Footnotes

I am grateful to E. Philip Davis, Martin Hellwig, Paul Pfleiderer, Matthew Zuck and two anonymous referees for helpful comments.

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