Home  Journals  Finance and Credit  27(651) - 2015 July

Implications of possible errors in bank capital regulating

Vol. 21, Iss. 27, JULY 2015

Article PDF Version

Received: 2 March 2015

Accepted: 28 April 2015

Available online: 7 August 2015

Subject Heading: Banking

JEL Classification: 

Pages: 13-24

Importance The article overviews ideological controversies between financial regulation approaches on the basis of the concepts of economism and free-market focusing.
     Objectives The research aims at demonstrating how tightened capital requirements for commercial banks, as adopted globally and nationally, can manage risks and concurrently generate them.
     Methods Using a comparative analysis of adopted agreements, from Basel I to Basel III, and analysis of the banking capital evaluation rules of the USA, I state that indeliberate errors in regulation may cause significant implications and consequences, like system financial crises.
     Conclusions and Relevance The article emphasizes weaknesses in evaluation of banking capital standards and rating systems used for capital models as per Basel Accords. It might cause a number of errors in banking, thus accumulating extensive risks of credit portfolio. The errors are reviewed, considering the last financial crisis of 2008-2009. Politicians and economists are facing a real challenge in answering who should develop rules for market agents, if not professional experts. Regulatory errors may result in irreparable damage and lead to system financial crises.

Keywords: Basel Accords, risk assessment, procyclicality effect, market discipline, moral hazard

References:

1. Aktual'nye problemy ekonomiki, politiki i prava [Actual issues of economics, politics and law]. Murmansk, Murmansk Academy of Economics and Management Publ., 2010, 261 p.
2. Galyaeva L.E. Institutsional'no-organizatsionnye aspekty regulirovaniya dostatochnosti kapitala banka [Institutional and organizational aspects of regulating the Bank’s capital adequacy]. Ekonomika: teoriya i praktika = Economics: Theory and Practice, 2011, no. 1, pp. 34–41.
3. Zotov A.N. Problemy funktsionirovaniya bankov v usloviyakh krizisa [Issues of banks’ operations during the crisis]. Bankovskie uslugi = Banking Services, 2010, no. 1, pp. 20–24.
4. Koshel' N.V. Formirovanie i upravlenie bankovskim kapitalom [Formation and management of the banking capital]. Den'gi i kredit = Money and Credit, 2010, no. 4, pp. 54–59.
5. Leonov M.V. Regulirovanie minimal'nogo razmera sobstvennogo kapitala kommercheskikh bankov v Rossii: problemy metodologii i praktiki [Regulating the minimum equity of commercial banks in Russia: methodological and practical issues]. Teoreticheskaya ekonomika = Theoretical Economy, 2015, no. 1, pp. 36–48.
6. Matovnikov M.Yu. Novatsii v regulirovanii: zlo ili blago? [Innovation in regulation: good or evil?]. Den'gi i kredit = Money and Credit, 2012, no. 5, pp. 30–34.
7. Ol'khova R.G. Bazel'skoe soglashenie po kapitalu: evolyutsiya i sovremennye trebovaniya [The Basel Accord on capital: the evolution and current requirements]. Finansy, den'gi, investitsii = Finances, Money, Investments, 2011, no. 3, pp. 3–10.
8. Simanovskii A.Yu. Perspektivy bankovskogo regulirovaniya: otdel'nye aspekty [Prospects of banking regulation: some aspects]. Den'gi i kredit = Money and Credit, 2009, no. 7, pp. 23–25.
9. Tarasenko O.A., Khomenko E.G. Bankovskaya sistema Rossiiskoi Federatsii i ee antikrizisnoe regulirovanie [The banking system of the Russian Federation and its crisis management]. Moscow, Norma Publ., 2009, 304 p.
10. Amato J., Furfine C. Are Credit Ratings Procyclical? BIS Working Papers, 2003, no. 129. Available at: Link.
11. Brereton N. Data Show Big Exposure for Banks in Euro Zone. The Wall Street Journal, 2010. Available at: Link. (accessed 14.06.2010)
12. Benink H., Danielsson J., Jonsson A. On the Role of Regulatory Banking Capital. Financial Markets, Institutions & Instruments, 2008, vol. 17, iss. 1, pp. 85–96.
13. Cotter R.V. Capital Ratios and Capital Adequacy. National Banking Review, 1966, no. 3, pp. 34–46.
14. Danielsson J., Embrechts P., Goodhart C., Keating C., Muennich F., Renault O., Shin H.S. An Academic Response to Basel II. LSE Financial Markets Group Special Paper, 2001, no. 130. Available at: Link.
15. Evans A.J., Friedman J. ‘Search’ vs. ‘Browse’: A Theory of Error Grounded in Radical (Not Rational) Ignorance. Critical Review, 2011, vol. 23, iss. 1-2, pp. 73–104.
16. The First Fifty Years: A History of the FDIC, 1933–1983. Washington, FDIC, 1984. Available at: Link.
17. Stiglitz J.E. The Anatomy of a Murder: Who Killed the American Economy? Critical Review, 2009, vol. 21, iss. 2-3, pp. 329–339.
18. Stiglitz J.E. The Non-Existent Hand. London Review of Books, 2010, vol. 32, no. 8, pp. 17–18.
19. Stiglitz J.E. Freefall: America, Free Markets, and the Sinking of the World Economy. New York, Norton, 2010, 480 p.
20. Winston C. Government Failure vs. Market Failure. Washington, AEI Brookings Joint Center for Regulatory Studies, 2006, 132 p.

View all articles of issue

ISSN 2311-8709 (Online)
ISSN 2071-4688 (Print)

Journal current issue

Vol. 30, Iss. 3 March 2024

Archive