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Less Really Can be More: Why Simplicity & Comparability Should be Regulatory Objectives

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  • Richard J. Herring

    (University of Pennsylvania)

Abstract

Regulatory complexity undermined efforts to strengthen financial stability before the crisis. Nonetheless, post-crisis reforms have greatly exacerbated regulatory complexity. Using the example of capital regulation, this paper shows how complexity has grown geometrically from the introduction of the Basel Accord on Capital Adequacy in 1988 to the introduction of Basel III and the total loss-absorbing capacity (TLAC) proposal in 2015. Analysis of the current welter of required capital ratios leads to a proposal to eliminate 75 % of them without jeopardizing the safety and soundness of the system. Quite possibly, regulators might argue that one or more of these deleted ratios does make an important incremental contribution to the safety and soundness of the system. But these important debates are not taking place in public, in part because we lack systematic measures of the costs of regulatory compliance and effective sunset laws that would require that regulations meet a rigorous cost-benefit test periodically. The concluding section poses the more speculative question of why, despite the evident advantages of a simpler, more transparent regulatory system, the authorities layer on ever more complexity.

Suggested Citation

  • Richard J. Herring, 2016. "Less Really Can be More: Why Simplicity & Comparability Should be Regulatory Objectives," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 44(1), pages 33-50, March.
  • Handle: RePEc:kap:atlecj:v:44:y:2016:i:1:d:10.1007_s11293-016-9488-4
    DOI: 10.1007/s11293-016-9488-4
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    References listed on IDEAS

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    1. Barth,James R. & Caprio,Gerard & Levine,Ross, 2008. "Rethinking Bank Regulation," Cambridge Books, Cambridge University Press, number 9780521709309, September.
    2. Charles W. Calomiris & Stephen H. Haber, 2015. "Fragile by Design: The Political Origins of Banking Crises and Scarce Credit," Economics Books, Princeton University Press, edition 1, volume 1, number 10177-2.
    3. Carmassi, Jacopo & Herring, Richard J., 2015. "Corporate Structures, Transparency and Resolvability of Global Systemically Important Banks," Working Papers 15-10, University of Pennsylvania, Wharton School, Weiss Center.
    4. Richard J. Herring, 2002. "The Basel II approach to bank operational risk: regulation on the wrong track," Proceedings 826, Federal Reserve Bank of Chicago.
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    Citations

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    Cited by:

    1. Thomas L. Hogan, 2021. "A Review of the Regulatory Impact Analysis of Risk-Based Capital and Related Liquidity Rules," JRFM, MDPI, vol. 14(1), pages 1-29, January.
    2. James R. Barth & Stephen Matteo Miller, 2018. "On the Rising Complexity of Bank Regulatory Capital Requirements: From Global Guidelines to their United States (US) Implementation," JRFM, MDPI, vol. 11(4), pages 1-33, November.
    3. Sophia Velez & Michael Neubert & Daphne Halkias, 2020. "Banking Finance Experts Consensus on Compliance in US Bank Holding Companies: An e-Delphi Study," JRFM, MDPI, vol. 13(2), pages 1-14, February.
    4. Barth, James R. & Miller, Stephen Matteo, 2018. "Benefits and costs of a higher bank “leverage ratio”," Journal of Financial Stability, Elsevier, vol. 38(C), pages 37-52.
    5. G. Gospodarchuk G. & Г. Господарчук Г., 2019. "Резервный буфер капитала как инструмент макропруденциальной политики // Reserve Capital buffer as an Instrument of Macroprudential Policy," Финансы: теория и практика/Finance: Theory and Practice // Finance: Theory and Practice, ФГОБУВО Финансовый университет при Правительстве Российской Федерации // Financial University under The Government of Russian Federation, vol. 23(4), pages 43-56.
    6. Herstatt, Cornelius & Tiwari, Rajnish, 2020. "Opportunities of frugality in the post-Corona era," Working Papers 110, Hamburg University of Technology (TUHH), Institute for Technology and Innovation Management.
    7. Stephen Matteo Miller & Blake Hoarty, 2021. "On regulation and excess reserves: The case of Basel III," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(2), pages 215-247, June.

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