Banking Regulation at a Crossroads

There is an ongoing debate over the right concept to adopt as far as banking regulation is concerned. Should the approach embodied by Basel II, which is oriented towards the bank’s risk via its equity capital, be further developed; or should a non-risk oriented figure like the leverage ratio (balance sheet equity to business volume) be the central indicator for the banking supervisory authority? In this article Stephan Paul, Ruhr-University Bochum, and Stefan Stein, University of Applied Science BiTS Business and Information Technology School in Iserlohn, discuss which form of regulation is the most appropriate.