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.

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