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Market-based bank capital regulation

Market-based bank capital regulation

Easy solutions won’t work

Simply doubling or trebling capital requirements won’t do. For instance, in 2008-11 the united states Federal Deposit Insurance Corporation (FDIC) lost money on 413 bank failures. Say that those banks – which required 6% core tier 1 regulatory equity to be classified as ‘well capitalized’ – each held a supplementary 14% of assets in cash, but no extra debt on your day they failed. This infusion could have been insufficient to cover losses in 372 (90%) of the cases. 2 Of course many of these banks were not at all hard; more technical large banks may have better risk management, but also more scope for trouble.