Financial Market Regulation in Germany - Capital Requirements of Financial Institutions

Abstract

This paper examines banks’ capital adequacy regulation in Germany. It reviews the capital requirement regulation in Germany from a historical perspective, and identifies general trends. Such analysis allows pointing out some severe problems associated with the current approaches to capital requirement regulation. Among the recent trends is the gradual softening of the eligibility criteria for regulatory equity, and the reliance on internal risk models for the determination of risk weights. While the former trend has been reversed after the crisis, the latter is still pursued. The problems inherent in using internal risk models to determine capital requirements are discussed in relation to changes due to the introduction of Basel II.5 and Basel III. JEL codes: G18, G28, N24

Keywords

• Banking Regulation
• Capital Adequacy
• Risk Models
• Germany