Template-type: ReDIF-Paper 1.0
Author-Name: Jeremy Bulow
Author-Workplace-Name: Standford University, USA
Author-Email: jbulow@standford.edu
Author-Name: Paul Klemperer
Author-Workplace-Name: Nuffield College, University of Oxford, UK
Author-Email: paul.klemperer@economics.ox.ac.uk
Title: Market-Based Bank Capital Regulation
Abstract: Today’s regulatory rules, especially the easily-manipulated measures of regulatory capital, 
have led to costly bank failures.  We design a robust regulatory system such that (i) bank losses are 
credibly borne by the private sector (ii) systemically important institutions cannot collapse suddenly; 
(iii) bank investment is counter-cyclical; and (iv) regulatory actions depend upon market signals 
(because the simplicity and clarity of such rules prevents gaming by firms, and forbearance by 
regulators, as well as because of the efficiency role of prices).  One key innovation is “ERNs” 
(equity recourse notes--superficially similar to, but importantly distinct from, “cocos”) which 
gradually "bail in" equity when needed. Importantly, although our system uses market information, 
it does not rely on markets being “right”.
X-Classification-JEL: 
X-Keywords: 
Length: 67 pages
Creation-Date: 2013-09-15
Number: 2013-W12
File-URL: http://www.nuffield.ox.ac.uk/economics/papers/2013/MBBCRFinalpaperSept.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1312