Very low policy rates as well as the substantial redesign of rules and supervisory institutions have changed background conditions for the Euro Area's financial intermediary sector substantially. Both policy initiatives have been targeted at improving societal welfare. And their potential side...

Jon Danielsson discusses the use of capital ratios and macroprudential regulation and describes the limitations of each policy: How banks can inflate capital ratios, how capital requirements fail to reduce the risk of aggregate shocks and how Basel III regulations burden smaller banks relative...