An often-heard complaint is that markets and banks will overreact to changing capital ratios, the bank will be overpenalized, or the bank will overrespond in its lending policies. However, the evidence is sufficient to take a more positive view of markets and their ability to evolve in the presence of new and better information.
Perhaps more important, these concerns tend to ignore the behavioral effects that more-risk-sensitive regulatory capital ratios will induce. Earlier I noted the cyclical pattern that historically has characterized bank credit availability, a pattern exacerbated by the lack of formal and systematic credit-risk management.