Bank capital regulation should be abandoned

Regulation of capital is unnecessary and has proven dangerous

Commenting on the Bank of England’s new bank capital rules, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
 


“The regulation of capital is unnecessary and has proven dangerous. Before the financial crisis, banks developed all sorts of complex mechanisms to game the rules which made the banking system more complex and more hazardous. Arguably the authorities are now undermining the economy by requiring banks to be too safe.”
 


The IEA today released new research suggesting that bank capital requirements should be abolished.
 


In this new paper, Do we need regulation of bank capital? Some evidence from the UK, it is shown that banks held appropriate amounts of capital before the introduction of capital regulation through the Basel system.
 


The report recommends that the whole apparatus of bank capital regulation, which has done so much to make the banking system more opaque, should be abandoned. Attempts by the British government to require large banks to hold very high levels of capital are misguided. Instead, the principle which should be at the heart of regulatory reform is that banks should be wound up in an orderly way if they fail.



Commenting on the paper, Prof. Philip Booth, Editorial Director at the Institute of Economic Affairs, said:
 


“We still need to learn the lessons of the last financial crash. Banking is inherently risky and from time to time banks will fail. Great swathes of complex capital regulation made banking riskier and less transparent.
 


“The insistence on ever-increasing regulation of UK banks is simply encouraging gaming of the system. The best way to ensure banks accurately assess risk is to create a system so banks can fail in an orderly fashion. The requirement of the UK government for banks to hold more capital is damaging the economy. It also suggests that the government does not believe its own rhetoric when it says that new regulations will enable failing banks to be wound up at no cost to the taxpayer.”
 


Notes to editors

To arrange an interview with an IEA spokesperson, please contact Stephanie Lis, Communications Officer: 0207 799 8900 or 07766 221 268.

The full report, Do we need regulation of bank capital?: Some evidence from the UK, by Forrest Capie and Geoffrey Wood, can be downloaded here.
 


The mission of the Institute of Economic Affairs is to improve understanding of the fundamental insti