Rethinking the Direction of Bank Capital Regulation

摘要

Bank regulators had to make hundreds if not thousands of important decisions about how to respond to the events of the financial crisis of 2008-09. Since the crisis, dozens of books like Too Big to Fail have examined many of these decisions in great detail. But bank regulators made one important choice that needs more attention: the path that bank capital reform should take in response to the crisis. This choice centered on how to use the three pillars of bank capital regulation-rules, supervision, and market discipline-to improve the safety and soundness of individual institutions as well as overall financial stability. The crisis clearly demonstrated that too much reliance had been placed on market discipline during the previous decade, so the choice facing regulators was whether reforms to bank capital regulation would emphasize rules (Pillar 1) or supervision (Pillar 2).