The Federal Reserve regulates U.S. commercial banks using a system of risk-based capital (RBC) regulations based on the Basel Accords. Unfortunately, the Fed’s mis-rating of several assets such as mortgage-backed securities encouraged the build-up of these assets in the banking system and was a major contributing factor to the 2008 financial crisis. The Basel system of RBC regulation is a prime example of a Hayekian knowledge problem. The contextual, tacit, and subjective knowledge required to properly assess asset risk cannot be aggregated and utilized by regulators. An effective system of banking regulation must acknowledge man’s limited knowledge and place greater value on individual decisions than on top-down planning.
The authors thank their reviewers and participants at the 2014 Wirth Institute Austrian School of Economics biennial conference for helpful comments and suggestions. Thomas Hogan is currently a committee staff member in the United States Senate. The views expressed here are those of the authors alone and do not reflect the views of any senator or committee.
Hogan, T. and Manish, G. (2016), "Banking Regulation and Knowledge Problems", Studies in Austrian Macroeconomics (Advances in Austrian Economics, Vol. 20), Emerald Group Publishing Limited, pp. 213-234. https://doi.org/10.1108/S1529-213420160000020010Download as .RIS
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