New Capital and Liquidity Requirements

Bank regulation has important economic effects and the round of major financial reforms in response to the great financial crisis of 2007–9 will certainly have impacts on the wider economy. Judging what those will be is complex and difficult. Quantifying them is even harder, but it is important to form some judgments regardless, since regulation is a balancing act. Occasionally we can achieve greater safety for free, principally by insisting on intelligent risk management to block the kind of stupid actions that seem appealing in the middle of a bubble. However, in the great majority of cases safety comes at a cost to efficiency and economic growth in normal years, which must be balanced against the large benefits of reducing the frequency and severity of financial crises. Most financial regulation is effectively a purchase of insurance against crises and we need to judge whether the annual premiums are worth the protection against infrequent, but devastating, events…