Reconsidering bank capital regulation: a new combination of rules, regulators, and market discipline
Connel Fullenkamp and
Journal of Economic Policy Reform, 2017, vol. 20, issue 4, 343-359
Despite revisions to bank capital standards, fundamental shortcomings remain: the rules for setting capital requirements need to be simpler, and resolution should be an essential part of the capital requirement framework.We propose a revised system of capital regulation that addresses these needs by making changes to all three pillars of bank regulation: only common equity should be recognized as regulatory capital, and risk weighting of assets should be abandoned; capital requirements should be assigned on an institution-by-institution basis according to a regulatory (s, S) approach developed in the paper; a standard for prompt, corrective action is incorporated into the (s, S) approach.
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