Date Added: Jul 2010
Bank capital requirements were the cornerstone of financial regulation up until the global financial crisis. In the wake of the crisis there have been many calls for reform of financial regulation, with a first step having been recently passed in the United States. In this paper, the authors offer a vision for how a new regulatory regime could be designed. Their prescriptions follow from a specific theory of how modern financial crises unfold, and why both an unregulated financial system, as well as one based primarily on capital rules just for banks, is likely to be fragile.