Reinventing Financial Regulation: A Blueprint for Overcoming Systemic Risk

APPENDIX B

Banks Put Themselves at Risk at Basel

The biggest problem for regulators is “capture”—a situation that happens when their activities are influenced excessively by those they are supposed to be regulating. In the case of banks, you can imagine how this happens.¹ A bright, young regulator receives a call from a vice chairman of the bank he would quite like to work for later. The vice chairman explains that there are some complex issues at stake and to help clarify them he has asked an eminent economist to write a report explaining why a regulatory proposal is economically inefficient. The vice chairman adds that if the offending regulation is enacted, the bank will have to move its profitable operations to the British Virgin Islands, ...