Reconsidering bank capital regulation: a new combination of rules,regulators, and market discipline

Despite revisions to bank capital standards, fundamental shortcomings remain: the rules for setting capital requirements need to be simpler, and resolution should be an essential part of the capital requirement framework.We propose a revised system of capital regulation that addresses these needs by making changes to all three pillars of bank regulation: only common equity should be recognized as regulatory capital, and risk weighting of assets should be abandoned; capital requirements should be assigned on an institution-by-institution basis according to a regulatory (s, S) approach developed in the paper; a standard for prompt, corrective action is incorporated into the (s, S) approach.