Making Commercial Law: Essays in Honour of Roy Goode

By Ross Cranston; Royston Miles Goode | Go to book overview
Save to active project

16
Models-Based Regulation of Bank Capital

HAL S. SCOTT


A. Introduction

American bank regulation has typically been based on a command and control approach. Law-makers or regulators formulate both the regulatory objectives, e.g. safety and soundness, and the means to achieve them, e.g. requiring 8 per cent. risk-based capital with detailed rules of calculation. In contrast, in a system of performance-based regulation, regulators only formulate objectives, leaving to those regulated the choice of how to achieve them. Thus, in various areas of environmental regulation, firms are only told what levels of emission of pollutants are acceptable and are left free to decide how best to meet them.1

Bank regulators have recently adopted a new approach, models-based regulation ('MBR'), to deal with capital required to cover market risk. Banks are left free to devise their own models for determining the needed level of capital to deal with potential price changes in securities and derivatives, subject to parameters set by the regulators. While this clearly represents a departure from command and control regulation, it does not move all the way to performance regulation given the imposition of parameters. The decision to impose parameters has been a subject of some dispute. The banking industry would prefer a total performance approach. However, the measurement of performance of self-adopted bank capital imposes different problems than in many other areas of regulation.

Once performance falls below the standard 'no bank failure' it is too late; the bank has failed. Given the omnipresent possibility of large costs associated with systemic risk, the failure of one bank triggering a multiplicity of others, regulators are unlikely to permit pure performance standards. In other areas, like pollution control, a one-day or even one-month failure to meet standards is not necessarily a disaster; past performance can be largely remedied.

What explains the development of MBR? With respect to regulation of capital for market risk it is mainly the complexity of the task. Regulators are

____________________
1
See generally, I. Ayres and J. Braithwaite, Responsive Regulation ( Oxford, 1992), pp. 101- 32where the authors discuss 'enforced self-regulation' which is similar to performance-based regulation.

-377-

Notes for this page

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this page

Cited page

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited page

Bookmark this page
Making Commercial Law: Essays in Honour of Roy Goode
Table of contents

Table of contents

Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this book

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen
/ 592

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?