Rules, Standards, and Complexity in Capital Regulation
U.C. Berkeley School of Law; University of California, Berkeley - School of Law, Berkeley Center for Law, Business and the Economy ; University of California, Berkeley
Journal of Legal Studies, Forthcoming
This article considers whether cost-benefit analysis can inform two important issues in the capital regulation of banks: (1) the choice of a rule or standard and (2) the level of complexity in that rule or standard. I analyze these issues by examining the historical adoption of minimum capital requirements and risk-based capital requirements. I argue that simple, minimum capital requirements are most useful when regulators seek to manage poorly understood risks with large externalities. I argue that risk-weighted capital requirements are most useful when regulators face well-understood risks while acting as agents of ordinary bank creditors. I suggest how these principles can help inform regulatory decision-making in the face of uncertainty over the cost of capital regulation.
Number of Pages in PDF File: 31
Keywords: bank, regulation, cost-benefit, capital, rules, standardsAccepted Paper Series
Date posted: December 25, 2013 ; Last revised: June 10, 2014
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