Bank Capital Standards: A critical review

The aim of this paper is to review the significant flaws in the Basel Accords, which undermine their contribution to stability in banking and financial markets. Four main lines of analysis are used: book vs. financial accounting and the cost of equity for banks; the study of risk and of risk modelling adopted by capital regulators and supervisors; the problem of incentives; the ever-increasing complexity of the capital standards. These four strands are inherently intertwined; for presentation purposes they are dealt in turn, to show in the conclusions their overall implications for adaptation of the Basel III framework, before its enactment.

NB: Paper amended page 30, line11 (Feb14) transposition of 'assets' and 'liabilities'

Download