Class Eleven -- October 2, 2014

After reviewing any carry-over materials from the previous week, we will focus our attention on the evolution of risk-based capital rules as described in Heidi M. Schooner & Michael W. Taylor, Global Bank Regulation: Principles and Policies ch. 8-10 (2011) (an introduction and history of capital requirements, the evolution of Basel capital standards over the past few decades, and related matters). The design of capital standards raises a host of important questions of regulatory policy, among them the question of whether these standards should incorporate market information or the assessment of third party experts, such as rating agencies. On the former, consider Hal S. Scott & Anna Gelpern, International Finance, 18th Ed., 2011, p 524-530 (18th ed. 2011) (discussion of market alternatives to capital regulation by observing market prices on certain instruments such as subordinate debt and CDS spreads, as well as stress tests). On the latter, consider Aron Verständig, Research Memorandum on Efforts to Reduce Reliance on Credit Ratings (Dec. 2013).