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Reconsidering bank capital regulation: a new combination of rules, regulators, and market discipline

The authors say that the rules for setting capital requirements need to be simpler, and resolution should be an essential part of the capital framework. They propose a new system of capital regulation that addresses these needs by making changes to all three pillars of bank regulation.

IMF working paper No. 14/169
15 September 2014
Source: International Monetary Fund

Authors:
Connel Fullenkamp, Duke University
Céline Rochon, International Monetary Fund

>  Reconsidering bank capital regulation

Abstract:

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 new 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 capital for regulatory purposes, 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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