Global Bank Regulation

Chapter 11

Direct Limits on Banks’ Risk Taking

The preceding three chapters focused on bank regulators’ increasingly complex rules requiring banks to hold capital against risk. However, there are some risks that capital cannot insure against. Long before the development of risk-adjusted capital requirements, bank regulators imposed other prudential requirements designed to limit banks’ risk-taking activities. In this chapter we consider two such requirements that address credit concentration risk and liquidity risk. Although banks are expected to allocate capital against both credit concentration risk and liquidity risk as part of the Internal Capital Adequacy Assessment Process (ICAAP) process, direct controls on risk taking in both of these ...