Do we need regulation of bank capital? Some evidence from the UK

Swathes of complex capital regulation have made banking riskier

Executive summary:

  • Banks need to keep both capital and liquidity against unforeseen events.
  • During the early-mid nineteenth century, there were a number of banking crises. Banks 
responded by holding higher levels of capital.
  • An analysis of bank capital shows that they adjusted their capital ratios according to the risks 
that they were taking and that they were well capitalised in comparison with the standards 
set by regulators under the Basel I and Basel II approaches.
  • Indeed, when bank capital levels became very thin after the Second World War, banks were 
prevented by the Bank of England from raising more capital, despite their appeals to the 
  • During this long period of prudent management of the banking sector, there was no clear 
expectation that the state would have stepped in to save an insol