How Much Bank Capital is Enough: Reconciling the Views of Academics and Regulators

Abstract

The global financial crisis has further highlighted the importance of bank capital regulation for the stability of the banking system. This article aims to reconcile the views of the academics and regulators about bank capital regulation. Lightweight and procyclical bank capital regulation with ample possibilities for regulatory arbitrage has contributed to the pre-crisis lending boom and subsequent credit crunch. As a result, new capital standards have been drawn and new regulatory and supervisory frameworks have been created, particularly in the EU. The regulatory overhaul aims at establishing a well capitalized banking system that is better able to cope with economic and financial fluctuations. Yet, the path ahead is not without difficulties. We stress that capital regulation and its impact cannot be analyzed in isolation but in combination with other regulatory and supervisory environment.

Keywords: Bank Regulation, Capital Regulation, Bank Capital, Baking Crisis, Financial Crisis

JEL Classification: G20, G21, G28, G32, G38, H81, K23