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Banking Regulation: A Systemic View on Capital Adequacy, Financial Systems and the Regulatory Process

Burghof, Hans-Peter

Credit and Capital Markets – Kredit und Kapital, Vol. 53 (2020), Iss. 3: pp. 305–323

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Article Details

Author Details

Univ-Prof. Dr. Hans-Peter Burghof, University of Hohenheim, Faculty of Business, Economics and Social Sciences, Chair of Banking and Financial Services, Schwerzstrasse 38, D-70599 Stuttgart

References

  1. Admati, A. R./DeMarzo, P. M./Hellwig, M. F./Pfleiderer, P. (2010): Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, working paper 2010/42, Max Planck Institute for Research on Collective Goods, Bonn.  Google Scholar
  2. Diamond, D. W. (1984): Financial Intermediation and Delegated Monitoring, Review of Economic Studies, Vol. 51, 393–414.  Google Scholar
  3. Admati, A. R./DeMarzo, P. M./Hellwig, M. F./Pfleiderer, P. (2010): Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, working paper 2010/42, Max Planck Institute for Research on Collective Goods, Bonn.  Google Scholar
  4. Diamond, D. W. (1984): Financial Intermediation and Delegated Monitoring, Review of Economic Studies, Vol. 51, 393–414.  Google Scholar

Abstract

In a comment for the Finance Committee of the Deutscher Bundestag on the finalization of Basel III, I scrutinize the debate on the costs of bank equity, look at the incentive effects and potential distortions provoked by the actual regulatory regimes, and finally describe banks’ regulation as a hysteretic process that creates detrimental phases of under- und overregulation. With regard to the first topic, I find strong arguments in the theory of financial intermediation that, in contradiction to the reasoning in the influential paper of Admati et al. (2010), bank equity is indeed costly and excessive capital requirements would hamper the efficiency of the banking system. Furthermore, I identify several incentive effects of today’s regulatory setting that lead to a more homogenous banking system with larger banks. This development could have negative effect on efficiency, in particular with regard to special needs of the German economy. And although the indivi­dual banks might be safer under the new regime, the evolving structure will probably contain a higher systemic risk.