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Ratio controls need reconsideration

Goodhart, Charles (2013) Ratio controls need reconsideration. Journal of Financial Stability, 9 (3). pp. 445-450. ISSN 1572-3089

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Identification Number: 10.1016/j.jfs.2013.02.001

Abstract

Bank equity capital can play several roles; for example as a buffer against (unexpected) loss, as protection for other creditors in bankruptcy, and as 'skin in the game'. There was never sufficient discussion of which role(s) the BCBS capital adequacy requirements (CARs) were meant to play, and whether they did so satisfactorily. In practice they did not. I discuss what principles should lie behind CARs if we could design these from scratch. I argue that there should be a minimum intervention point triggering official action to depose management and shareholders, and then move to resolution, with an increasingly penal ladder of sanctions as equity capital falls towards this point. A similar approach should also be applied to liquidity requirements.

Item Type: Article
Official URL: http://www.journals.elsevier.com/journal-of-financ...
Additional Information: © 2013 Elsevier B.V.
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy; Liquidation
Sets: Research centres and groups > Financial Markets Group (FMG)
Date Deposited: 27 Mar 2013 14:47
Last Modified: 28 Mar 2017 14:32
URI: http://eprints.lse.ac.uk/id/eprint/49512

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