OECD Weighs in on Capital Regulation vs. Growth
Date: 16 December 2011
Source: OECD
The debate over the impact of bank capital requirements on economic growth continues, with the publication of a new working paper from the OECD. The macroeconomic consequences of the new capital requirements are a matter of contention, as discussed by a recent ICFR paper (please click here to view). The OECD’s paper argues that the use of risk-weights provides incentives for firms to circumvent regulations through innovation, and that tighter capital requirements based on risk-weightings will reinforce these incentives, which is surely an undesirable unintended consequence of new rules. Thus, capital regulation should move away from risk-weighting, the paper suggests, which may then redirect banks’ attention back to core economic functions. The paper argues that this readjustment will impose minimal macroeconomic costs, with a -0.02 percentage impact on GDP for every one percent increase in bank equity, relative to a risk-weighted regime.