The ascent and descent of banks’ risk-based capital regulation

Abstract The emergence of risk-based capital regulation that is allowing banks to use their internal risk models for regulatory purposes was among the main developments prior financial crisis. During crisis, it became evident these underestimated level risk. post-crisis approach brought a reversal policy by significantly reducing scope and making regulations less risk-sensitive. At first glance, this appears be step back toward an antiquated, sophisticated regime. This article analyses two transformations: from risk-sensitive before crisis subsequently. Its conclusion mixed system superior either purely non-risk-sensitive or regulation, because can help mitigate negative incentives both regulation.