Commentary: Capital Regulation and Risk Sharing
by Douglas Gale
New York University
Capital requirements are the principal tool of macroprudential
regulation of banks. Bank capital serves both as a buffer
and as a disincentive to excessive risk taking. When general
equilibrium effects are taken into account, however, it is not
clear that higher capital requirements will reduce the level of
risk in the banking system. In addition, an increase in the
required capital ratio can force banks to take on more risk in
order to achieve target rates of return.
JEL Codes: G01, G21, G28.
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