Market-Based Bank Capital Regulation

Jeremy Bulow and Paul Klemperer

No 9618, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Today?s regulatory rules, especially the easily-manipulated measures of regulatory capital, have led to costly bank failures. We design a robust regulatory system such that (i) bank losses are credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; (iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals (because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by regulators, as well as because of the efficiency role of prices). One key innovation is ?ERNs? (equity recourse notes--superficially similar to, but importantly distinct from, ?cocos?) which gradually "bail in" equity when needed. Importantly, although our system uses market information, it does not rely on markets being ?right?.

Keywords: Bank capital; Capital requirements; Debt overhang; Contingent capital; Bank crisis; Regulatory capital; Bail-in; Too-big-to-fail; Living wills; Systemically important financial institution (search for similar items in EconPapers)
JEL-codes: G10 G21 G28 G32 (search for similar items in EconPapers)
Date: 2013-08
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ias and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Working Paper: Market-Based Bank Capital Regulation (2013)
Working Paper: Market-Based Bank Capital Regulation (2013)
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