Bank regulation might have contributed to or even reinforced adverse systemic shocks that
materialised during the financial crisis. Capital regulation based on risk-weighted assets encourages
innovation designed to circumvent regulatory requirements and shifts banks’ focus away from their core
economic functions. Tighter capital requirements based on risk-weighted assets may further contribute to
these skewed incentives. The estimated macroeconomic costs of redirecting banks’ attention away from
such unconventional business practices are low. During a medium-term adjustment period, for each
percentage point of bank equity, regulation that is not based on risk-weighted assets would affect annual
GDP growth by -0.02 percentage point more than under the risk-weighted assets framework. Refocusing
banks’ attention toward their main economic functions is a core requirement for durable financial stability
and sustainable economic growth.
