What’s Wrong with Prudential Bank Regulation and How to Fix It

Testimony before the House Financial Services Committee. Read full testimony here. 

I explain why the current mix of prudential regulations of banks developed over the past three decades is not designed well enough to get us there. The pillars of that system include Basel risk-based capital ratio requirements, leverage limits, liquidity regulations, stress tests, and “orderly resolution.” As I will show, it is not just the particulars of these standards that are inadequate; they are misconceived and poorly designed. I propose regulatory reforms that would not only credibly limit private risk taking at public expense, but do so in a way that would improve the efficiency of our banking system. It is possible to credibly and substantially reduce (if not eliminate) bank bailouts, while also improving bank performance, and reducing the risks banks face from regulatory uncertainty.