Edited by Thorsten Beck - Vox

The Future of Banking
Capital Requirements in a Systemically Risky World” by Viral V Acharya and Matthew
Richardson) which explains how NYU Systemic Risk Rankings are implemented.
In summary, I support the push for higher capital requirements, but I stress that regulators
– in Basel, the UK, Switzerland, and the US – all fundamentally need to rethink whether
static risk weights, which do not change when the market’s risk assessment of an asset
class permanently changes, are really the right way to continue.
If we just keep raising capital to risk-weighted asset ratios but we do not improve
our measurement of risks in determining the denominator of these ratios, we have a
serious problem on hand. We have moved from a credit bubble in one low risk-weight
asset class (housing) to another (sovereign bonds) over the past decade and both have
resulted in among the worst crises of our times. It is time to change this state of affairs.
Editor’s note: This essay is based on a Vox Talks audio interview between the author
and Viv Davies recorded on 16 September 2011.
About the author
Viral V. Acharya is Professor of Finance at the New York University Stern School of
Business, and Director of the CEPR Financial Economics Programme. His research
interests are in the regulation of banks and financial institutions, corporate finance,
valuation of corporate debt, and asset pricing with a focus on the effects of cash
management and liquidity risk.
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