How Effective is Global Financial Regulation?

Abstract

After the Global Financial Crisis 2007-2010, the effectiveness of global financial regulation, as promoted by the Basel Committee on Banking Supervision, has been questioned. Conventional minimum capital requirements like the tier capital ratio seem to have failed in reducing the risk of bank failures. In light of the Basel III Accord, new and potentially better financial ratios are being developed to prevent future banking crises from happening. This paper compares bindingness and effectiveness characteristics of capital and liquidity ratios from the Basel I and III frameworks. It entails a series of descriptive and regression analyses to examine these ratios’ power to detect and mitigate bank failures. Surprisingly, the current tier capital ratio seems to denote an effective measure of bank failures in contrast to two newly developed measures, the common equity ratio and the net stable funding ratio.