Banking Regulation and Knowledge Problems

31 Pages Posted: 21 Jan 2016  

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

G.P. Manish

Troy University

Date Written: January 19, 2016

Abstract

The Federal Reserve regulates U.S. commercial banks using a system of risk-based capital (RBC) regulations based on the Basel Accords. Unfortunately, the Fed’s misrating of several assets such as mortgage-backed securities encouraged the build-up of these assets in the banking system and was a major contributing factor to the 2008 financial crisis. The Basel system of RBC regulation is a prime example of a Hayekian knowledge problem. The contextual, tacit, and subjective knowledge required to properly assess asset risk cannot be aggregated and utilized by regulators. An effective system of banking regulation must acknowledge man’s limited knowledge and place greater value on individual decisions than on top-down planning.

Keywords: Federal Reserve, Basel Accord, Risk-based capital, Knowledge problem

JEL Classification: G18, E58, P50

Suggested Citation

Hogan, Thomas L. and Manish, G.P., Banking Regulation and Knowledge Problems (January 19, 2016). Available at SSRN: https://ssrn.com/abstract=2718597 or http://dx.doi.org/10.2139/ssrn.2718597

Thomas L. Hogan (Contact Author)

Rice University - Baker Institute for Public Policy ( email )

6100 Main Street, MS-40
Houston, TX 77005
United States

G.P. Manish

Troy University ( email )

Troy, AL
United States

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