Financial Regulation In A System Context

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The global financial crisis raises questions about the proper objectives of financial regulation and how best to meet them. Traditionally, capital requirements have been the cornerstone of bank regulation. However, the run on the investment bank Bear Stearns in March 2008 led to its demise even though Bear Stearns met the letter of its regulatory capital requirements. The risk-based capital requirements that underpin the Basel approach to bank regulation fail to distinguish between the inherent riskiness of an asset and its systemic importance. Liquidity requirements that constrain the composition of assets may be a necessary complement.