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Regulatory Capital of Financial Institutions: A Comparative Analysis

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  • Clifford A. Ball
  • Hans R. Stoll

Abstract

This study analyzes regulatory capital requirements of banks, thrifts and securities firms. Regulatory capital has traditionally guarded against credit risk and has been set on an asset‐by‐asset basis. Regulators now recognize the need to guard against a wider range of risks and to measure risk in a portfolio context rather than on an asset‐by‐asset basis. However, the measurement of portfolio risk in the presence of a wide variety of financial instruments and the complexity of financial institutions requires a level of sophistication that regulators are unlikely to possess. Consequently, it is important to reassess the purpose of regulatory captial. Regulatory capital now guards against the failure of the entire financial institution, while regulatory responsibility extends only to the insurance fund that guarantees bank deposits or brokerage accounts. Narrowing the regulatory focus to protect only insured accounts would reduce the need to consider all the activities of a financial instituion as is now necessary in order to establish regulatory capital.

Suggested Citation

  • Clifford A. Ball & Hans R. Stoll, 1998. "Regulatory Capital of Financial Institutions: A Comparative Analysis," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 7(3), pages 1-57, August.
    • Handle: RePEc:wly:finmar:v:7:y:1998:i:3:p:1-57
    DOI: 10.1111/1468-0416.00020
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    Cited by:

    1. Marc Saidenberg & Til Schuermann & May, "undated". "The New Basel Capital Accord and Questions for Research," Center for Financial Institutions Working Papers 03-14, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Andrew Kuritzkes & Til Schuermann & Scott M. Weiner, 2002. "Risk Measurement, Risk Management and Capital Adequacy in Financial Conglomerates," Center for Financial Institutions Working Papers 03-02, Wharton School Center for Financial Institutions, University of Pennsylvania.

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