Time to Set Banking Regulation Right

CEPS Paperbacks, Forthcoming

80 Pages Posted: 27 Mar 2012

See all articles by Jacopo Carmassi

Jacopo Carmassi

European Central Bank

Stefano Micossi

Associazione italiana delle società per azioni

Date Written: March 15, 2012

Abstract

Excessive leverage and risk-taking by large international banks were the main causes of the 2008-09 financial crisis and the ensuing sharp drop in economic activity and employment. World leaders and central bankers promised that it would not happen again and, to this end, undertook to overhaul banking regulation, first and foremost by rectifying Basel prudential rules. This study argues that the new Basel III Accord and the ensuing EU Capital Requirements Directive IV fail to correct the two main shortcomings of international prudential rules: reliance on banks’ risk management models for the calculation of capital requirements and the lack of accountability by supervisors. Accordingly, the authors propose the calculation of capital requirements without risk adjustment and creation of a system of mandated action by supervisors modeled on the US framework of Prompt Corrective Action (PCA). They also recommend that banks should be required to issue large amounts of debentures that are convertible into equity in order to strengthen market discipline on management and shareholders.

Keywords: banking regulation, banking, Basel Accord, EU Capital Requirements Directive IV, risk management, Prompt Corrective Action, PCA, debentures, financial crisis, accountability, capital requirements

Suggested Citation

Carmassi, Jacopo and Micossi, Stefano, Time to Set Banking Regulation Right (March 15, 2012). CEPS Paperbacks, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2028881 or http://dx.doi.org/10.2139/ssrn.2028881

Jacopo Carmassi (Contact Author)

European Central Bank ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Stefano Micossi

Associazione italiana delle società per azioni ( email )

Piazza Venezia 11
ROMA, 00187
Italy
+39 06 69529214 (Phone)

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