Implementing Basel Capital Requirements: The Dark Side

Following the recommendations of the Basel Committee on Banking Supervision, most financial systems around the world have imposed new capital requirements for banks in recent years. These moves seem to be justified on two powerful economic grounds. First, better capitalized banks promote financial stability by reducing banks’ incentives to take risks and increasing banks’ buffers against losses. Second, lack of compliance with a set of rules established by an internationally recognized institution such as the Basel Committee may harm confidence in a country´s financial system.

In a recent paper (available here), however, we argue that the implementation of Basel … Read more