OECD Economics Department Working Papers. Bank regulation might have contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. Capital regulation based on risk-weighted assets encourages innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core economic functions. Tighter capital requirements based on risk-weighted assets may further contribute to these skewed incentives. The estimated macroeconomic costs of redirecting banks’ attention away from such unconventional business practices are low. During a medium-term adjustment period, for each percentage point of bank equity, regulation that is not based on risk-weighted assets would affect annual GDP growth by -0.02 percentage point more than under the risk-weighted assets framework. Refocusing banks’ attention toward their main economic functions is a core requirement for durable financial stability and sustainable economic growth.
The simultaneous failure of markets and regulators to discipline systemically important banks before the financial crisis resulted in significantly negative consequences for economic output and government expenditures. This study discusses aspects of the failure of bank regulation and market discipline. Section I provides a perspective on the unintended consequences of bank regulation and argues that capital regulation might have contributed to or even reinforced adverse systemic shocks that materialised during the financial crisis. Section II discusses the conflict between the original role of banks in the economic system, which is to evaluate and provide loans to credit-worthy borrowers, and the decline in the profitability of this activity relative to other sources of bank income. The study finds, in Section III, that the economic costs of redirecting bank attention away from unconventional business practices are low. Section IV examines the relationship between the level of systemic importance of banks and their leverage. Financial market policy considerations and conclusions are drawn in Section V.
Slovik, P. (2011), “Systemically Important Banks and Capital Regulation Challenges”, OECD Economics Department Working Papers, No. 916, OECD Publishing"