The Missed Opportunity and Challenge of Capital Regulation

19 Pages Posted: 13 Jan 2016 Last revised: 29 Jan 2016

See all articles by Anat R. Admati

Anat R. Admati

Stanford Graduate School of Business

Date Written: December 1, 2015


Capital regulation is critical to address distortions and externalities from intense conflicts of interest in banking and from the failure of markets to counter incentives for recklessness. The approaches to capital regulation in Basel III and related proposals are based on flawed analyses of the relevant tradeoffs. The flaws in the regulations include dangerously low equity levels, complex and problematic system of risk weights that exacerbates systemic risk and adds distortions, and unnecessary reliance on poor equity substitutes. The underlying problem is a breakdown of governance and lack of accountability to the public throughout the system, including policymakers and economists.

Keywords: Banking regulation, capital regulations, banking, equity in banking, capital structure, leverage, agency costs, leverage ratchet effect Basel, risk weights, TLAC

JEL Classification: G21, G28, G32, G38, H81, K23

Suggested Citation

Admati, Anat R., The Missed Opportunity and Challenge of Capital Regulation (December 1, 2015). Rock Center for Corporate Governance at Stanford University Working Paper No. 216, Stanford University Graduate School of Business Research Paper No. 16-6, Available at SSRN: or

Anat R. Admati (Contact Author)

Stanford Graduate School of Business ( email )

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