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'Enforced Indebtedness' and Capital Adequacy Requirements

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  • Jan Toporowski

Abstract

The capital adequacy requirements for banks, enshrined in international banking regulations, are based on a fallacy of composition--namely, the notion that an individual firm can choose the structure of its financial liabilities without affecting the financial liabilities of other firms. In practice, says author Jan Toporowski, capital adequacy regulations for banks are a way of forcing nonfinancial companies into debt. "Enforced indebtedness" then reduces the quality of credit in the economy. In an international context, the present system of capital adequacy regulation reinforces this indebtedness. Proposals for "dynamic provisioning" to increase capital requirements during an economic boom would simply accelerate the boom's collapse. Contingent commitments to lend to governments in the event of private-sector lending withdrawals, alongside lending to foreign private-sector borrowers, are a much more viable alternative.

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  • Jan Toporowski, 2009. "'Enforced Indebtedness' and Capital Adequacy Requirements," Economics Policy Note Archive 09-7, Levy Economics Institute.
    • Handle: RePEc:lev:levypn:09-7
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    Cited by:

    1. Bernard Vallageas, 2013. "Basel III and the strengthening of capital requirement: the obstinacy in mistake or why ‘it’ will happen again," Chapters, in: Louis-Philippe Rochon & Mario Seccareccia (ed.), Monetary Economies of Production, chapter 9, pages 112-133, Edward Elgar Publishing.

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