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Back to the future: the nature of regulatory capital requirements

Author

Listed:
  • R. Chami

    (International Monetary Fund)

  • T. Cosimano

    (University of Notre Dame)

  • E. Kopp

    (International Monetary Fund)

  • C. Rochon

    (International Monetary Fund)

Abstract

This paper compares the current regulatory capital requirements under the Dodd–Frank Act and the 10-% leverage ratio, as proposed by the US Treasury and the US House of Representatives’ Financial CHOICE Act (FCA). We find that the majority of US banks would not qualify for an “off-ramp” option—where regulatory relief is offered to qualifying banks organizations (QBOs)—unless considerable amounts of capital are added and that large banks are much closer to the proposed leverage threshold and, therefore, are more likely to stand to gain from regulatory relief. The paper identifies an important moral hazard problem that arises due to the QBO optionality, where banks are likely to increase the riskiness of their asset portfolio and qualify for the FCA “off-ramp” relief with unintended effects on financial stability.

Suggested Citation

  • R. Chami & T. Cosimano & E. Kopp & C. Rochon, 2018. "Back to the future: the nature of regulatory capital requirements," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(4), pages 327-336, November.
    • Handle: RePEc:pal:jbkreg:v:19:y:2018:i:4:d:10.1057_s41261-018-0061-8
    DOI: 10.1057/s41261-018-0061-8
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    References listed on IDEAS

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    1. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
    2. Xavier Freixas & Jean-Charles Rochet, 2008. "Microeconomics of Banking, 2nd Edition," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262062704, April.
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    Cited by:

    1. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    2. Ghulame Rubbaniy & Ali Awais Khalid & Stathis Polyzos & Balqees Naser Almessabi, 2022. "Cyclicality of capital adequacy ratios in heterogeneous environment: A nonlinear panel smooth transition regression explanation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1960-1979, September.

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    More about this item

    Keywords

    Dodd–Frank Act; Financial CHOICE Act; Capital adequacy; Leverage ratio; Regulatory arbitrage;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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