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How Do Bank Regulators Determine Capital-Adequacy Requirements?
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Journal Article
How Do Bank Regulators Determine Capital-Adequacy Requirements?
2015
Overview
Regulators require banks to maintain capital above a certain level in order to correct the incentives to make excessively risky loans. However, it has never been clear how regulators determine how high or low the minimum capital-asset ratio should be. An examination of US regulators' justifications for five regulations issued over more than thirty years reveals that regulators have never performed a serious economic analysis that would justify the levels that they have chosen. Instead, regulators appear to have followed a practice of incremental change designed to weed out a handful of outlier banks. This approach resulted in significant regulatory failures leading up to the financial crisis of 2007-2008.
Publisher
The University of Chicago Law School,University of Chicago, acting on behalf of the University of Chicago Law Review
