Capital Regulation and Financial Stability
Summary
Capital regulation refers to the set of prudential rules that determine the minimum equity banks must hold relative to their assets, with the aim of absorbing losses and curbing systemic risk. Since the introduction of the Basel accords, successive reforms have raised both the quantity and quality of required capital, introduced buffers to counter procyclicality and established leverage ratios as backstops. These measures seek to strengthen individual institutions and the banking sector as a whole, reducing the probability and severity of crises. However, tighter requirements can also influence credit supply, profitability and competitive dynamics, prompting ongoing debate about optimal calibration. Complementary tools—such as stress tests, counter-cyclical buffers and resolution regimes—further reinforce the resilience of the financial system. The global evolution of capital standards underscores their centrality for sustainable economic growth and financial stability.
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Capital Regulation and Financial Stability publication trend
The graph below shows the total number of articles in capital regulation and financial stability across all publications each year (not limited to Nature Index journals).
Technical terms
Capital requirement: Minimum equity a bank must hold against its risk-weighted assets to absorb losses and support solvency.
Risk-weighted assets (RWAs): Balance-sheet items adjusted by risk factors to reflect potential loss exposure for capital calculation.
Model-based regulation: Framework allowing banks to use internal risk assessment models to determine capital requirements, subject to supervisory approval.
Counter-cyclical buffer: Additional capital reserve activated during periods of excessive credit growth to dampen systemic risk.
Quasi-natural experiment: Empirical approach using an exogenous policy change or event as a means to identify causal effects in observational data.
References
- The Limits of Model‐Based Regulation. The Journal of Finance (2022).
- Do Capital Requirements Make Banks Safer? Evidence From a Quasinatural Experiment. Journal of Financial and Quantitative Analysis (2021).
- The impact of bank regulation on firms’ capital structure: Evidence from multinationals. Journal of Banking & Finance (2022).
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