This paper reviews the theoretical and empirical arguments behind the increase in capital requirements proposed by the Basel III regulations. The detailed analysis of both theory and evidence casts doubts on the benefi cial effects of Basel III. It is shown that the new regulations are unlikely to diminish risk taking in the banking industry and that the increased capital requirements most likely will lead to increased costs of funding for the industry with adverse consequences for the real economy.

Keywords: banking regulation, banking risk, cost of financing

JEL Codes: G21, G28, G32

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