The “norming” mentality led to weak regulations and an under-capitalized banking sector, and cost-benefit analysis is the best approach to regulate banks, says Chicago Law School.
Eric A. Posner of the University of Chicago published a report in September with the title: “How Do Bank Regulators Determine Capital Adequacy Requirements?” He notes it has never been clear how regulators determine the minimum capital-asset ratio.
Insufficient bank capitalization
The author notes that the incentive to take socially costly financial risks is inherent in banking. Such a perverse incentive to take financial risk is further aggravated by underpriced government-supplied insurance and the government’s readiness to play the role of lender of last resort.
Tracing the five regulations issued over more than 30 years, the author points out...
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