Financial Market Regulation in Germany - Capital Requirements of Financial Institutions

Daniel Detzer

Working papers from Financialisation, Economy, Society & Sustainable Development (FESSUD) Project

Abstract: 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.

Keywords: Banking Regulation; Financial Regulation; Capital Requirements; Capital Adequacy; Bank Capital; Basel Accord; Risk Management; Risk Models; Germany (search for similar items in EconPapers)
JEL-codes: G18 G28 N24 N44 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2014-02-15
New Economics Papers: this item is included in nep-ban, nep-cba, nep-cfn, nep-fmk and nep-rmg
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Citations: View citations in EconPapers (2)

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