December 2010 issue contents
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.

Full article (PDF, 8 pages 199  kb)