Daníelsson, J. (2003, June). On the feasibility of risk based regulation. CESifo Economic Studies 49.
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Risk based regulation has emerged as the primary ingredient in the Basel-II proposals, where a bank capital is to become a direct function of a bank's riskiness. While the notion that bank capital be risk sensitive is intuitively appealing, the actual implementation, in the form of Basel-II, carries with it a host of potentially perverse side effects. Basel-II may increase financial risk, both for individual institutions and the entire banking system, and hence promote financial instability. This can happen, e.g., due to the endogenous nature of risk.
@ARTICLE{Danielsson2002b,
author = {J{\'o}n Dan{\'\i}elsson},
title = {On the feasibility of risk based regulation},
journal = "CESifo Economic Studies",
volume = {49},
year = 2003,
}