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The Basel II Reform That Would Have Made Most Injections of Public Funds Unnecessary

Authors : Nol Amenc
Professor of Finance and Director of the EDHEC Risk and Asset Management Research Centre

Samuel Sender
Applied Research Manager at the EDHEC Risk and Asset Management Research Centre

The financial crisis has put great pressure on banks and led to a number of emergency measures intended to restore confidence in the banking system: tentative changes to accounting standards, recapitalisation of the banking industry, and higher capital requirements.

Each measure targets a specific concern that has arisen during the crisis.
Governments and regulators, however, have yet to deal with one of the essential causes of systemic risk: the inflexibility of prudential regulation for banking. As it happens, a single minor change would make it possible to restore much of the confidence in the banking sector without requiring any capital injections in the short term: acknowledging that banking capital ratios fall during downturns would have made most of the injections of public funds unnecessary. Making this change today would give governments far more room to support the real economy.
Type :
Position Paper
Dates :
Created on January 15, 2009

Finance


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