New Banking Regulation Approach Could Revolutionize Financial Stability
The pre-commitment approach to bank capital regulation suggests letting banks choose their own capital levels and penalizing them if they exceed those levels. This method aims to encourage riskier banks to hold more capital than safer ones. By increasing capital levels, the deposit insurance fund is better protected in case a bank cannot repay its depositors. This approach is a new way of regulating banks and is being evaluated for its effectiveness in reducing risks in the banking system.