Capital Adequacy Regulation: There is Hardly an Alternative

A critical summary of the theoretical and legal justifications of capital adequacy regulation (CAR) of banks is given. It is shown that CAR is particularly attractive since it uses an existing market mechanism (market for corporate control). The role of CAR in Switzerland is described. The survey shows that CAR is but one in a large group of regulatory instruments. All are justified by the same objectives. The analogy with the "Tinbergen Rule" suggests that a more parsimonious supervisory system is called for. This leads to a number of conclusions on how to improve regulation in Switzerland and elsewhere. The central position of CAR is not disputed.