Bank Capital regulation can learn from Inflation targeting

Hans Gersbach and Volker Hahn have an interesting article in voxeu. They say there are parallels between equity capital regulation and inflation targeting frameworks (ITF) of central banks. As we need to rethink about capital rule regulation, ITF could be of help.

What are the parallels?

  • Numerical target values
  • High social costs of downward deviations
  • The right index
  • Flexible vs. strict rules.
  • Commitment problems
  • Looking ahead
  • Reliance on sophisticated models
  • Transparency
  • International coordination

And what are the lessons??

  • Flexible bank-equity targeting
  • Cautious use of sophisticated models
  • Insufficient levels of regulatory capital
  • Making regulatory capture difficult

Not a bad insight. Though ITF Central banks themselves are being targeted and need to be modified. Nevertheless, some lessons can surely be learnt.

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