Governments might promise to refrain from bailouts in order to prevent moral hazard behaviour. But when financial stability is at stake, they have an incentive to deviate from their previous commitment. So, do higher capital ratios and the bail-in regime resolve the time inconsistency problem? No, but they do mitigate it substantially.
While the revamping of the Basel framework has not been finished yet, its completion is scheduled for this year. A further significant tightening of the capital requirements, in the sense of a “Basel IV”, is not on the agenda. I feel that’s something that needs to be said in order to prevent the financial industry from facing needless regulatory uncertainty.