Bank Regulation: Capital and Liquidity Requirements

This lecture covers the essential aspects of bank regulation, focusing on capital and liquidity requirements. It begins with an overview of the rationales for regulating banks, highlighting externalities such as systemic risk and the safety net provided by governments. The instructor discusses the importance of capital regulation, explaining how privately optimal capital levels may fall short of socially optimal levels due to externalities. Key concepts such as leverage ratios, risk-weighted capital ratios, and the distinction between Tier 1 and Tier 2 capital are introduced. The lecture also delves into the Basel Accords, detailing the evolution from Basel I to Basel III, emphasizing stricter capital requirements and the introduction of macroprudential policies. The discussion extends to the implications of the recent financial crises, particularly the 2007-2009 crisis and the 2023 banking turmoil, which raised questions about the adequacy of existing regulations. The lecture concludes with insights into the role of central banks as lenders of last resort and the necessity of liquidity regulation to prevent systemic failures in the banking sector.