Bank Capital Regulation by Enforcement: An Empirical Study
Julie Andersen Hill
University of Alabama - School of Law
February 28, 2011
Indiana Law Journal, Vol. 87, p. 645, 2012
U of Houston Law Center Paper No. 1773072
Improving commercial bank capital requirements has been a top priority on the regulatory agenda since the beginning of the 2008 financial crisis. Unfortunately, some of the information necessary to make informed decisions about capital regulation has been missing. Existing regulations establish numerical capital requirements. Regulators, however, have significant discretion to set higher capital requirements for individual banks. In considering necessary reforms, regulators often focus on specific numerical requirements, but sometimes ignore the structure of the regulations and discretionary enforcement efforts. Without clear information about discretionary capital enforcement actions, it is impossible to make informed judgments about the current capital regulation system.
This Article provides a more complete picture of discretionary capital enforcement. It reports an empirical study of all publicly available formal capital enforcement actions between 1993 and 2010. The data, compiled from more than 2300 enforcement actions, reveal four significant insights. First, the number of capital enforcement actions has dramatically increased during the current economic downturn. Second, an increasing number of banks are subject to individual capital requirements – requirements that are higher than the requirements specified in statutes and regulations. Third, the data suggest that enforcement rates are not consistent among bank regulators. In particular, the Federal Reserve is less likely than other regulators to bring serious capital enforcement actions and is less likely to increase capital requirements. Fourth, the data show a near complete absence of capital enforcement actions issued to the largest banks.
Because the study clearly reveals an increase in discretionary capital enforcement actions, the Article examines the proper role of this discretionary enforcement. It concludes that a capital regulation system that relies heavily on discretion is troublesome. Discretionary capital enforcement is often ineffective and costly. Moreover, the focus on individual bank conditions can blind regulators to macroeconomic problems. Instead, policymakers should work to create capital rules that are sufficient without significant discretionary capital enforcement.
Number of Pages in PDF File: 64
Keywords: bank, enforcement actions, capital, regulation, prompt corrective action, leverage ratio, risk-based capital
JEL Classification: G21, G28, K23
Date posted: February 28, 2011 ; Last revised: September 10, 2014