Working Paper: CEPR ID: DP9348
Authors: Thomas Gehrig
Abstract: This note critically assesses the Basel reform process of capital regulation. It highlights the political nature of this process and argues that the absence of clearly spelled-out societal objectives has been detrimental in furthering stability and soundness of the banking systems in the run-up of the 2007/8 financial crisis. The positive externalities of bank capital have not hitherto been explicitly been taken into consideration.
Keywords: bank capital; Basel; process of capital regulation; trust
JEL Codes: E58; G01; G21; H63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Failure of Northern Rock (G21) | Loss of trust among banks (F65) |
| Loss of trust among banks (F65) | Interbank markets freeze (F65) |
| Interbank markets freeze (F65) | Central banks intervene with liquidity support (E52) |
| Political choices regarding capital regulation (G18) | Increased risk-taking behavior of banks (G21) |
| Capital regulation incentives (G28) | Excessive leverage by banks (F65) |