Critics also argue that an explicit Pillar I capital charge would upset the competitive balance with nonbank and foreign bank competitors. Foreign regulators, it is argued, will be less aggressive in their rule enforcement than U.S. regulators. As I earlier suggested, Pillar III - disclosure - will highlight any significant differences across banks, in the expectation that counterparties will penalize inconsistent risk measures.
The forecast-based version employed here substitutes the change in the unemployment gap for the change in the output gap (using an Okun’s law coefficient of 2) and sets β to 0.5, yielding ΔR = 0.5 (π ̶ π*) ̶ Δu.