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Evaluating Risk-Based Capital Regulation

Mercatus Center Working Paper No. 13-02

39 Pages Posted: 1 Feb 2013  

Thomas L. Hogan

Troy University

Neil R. Meredith

West Texas A&M University; American Economic Association

Xuhao (Harry) Pan

West Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2013


Risk-based capital (RBC) ratios are an important component of US banking regulation, yet empirical evidence on the effectiveness of RBC regulation has been mixed. Avery and Berger (1991) find that the RBC ratio improves upon the standard capital ratio of equity over assets. This paper identifies some potential flaws in the Avery and Berger (1991) methodology and proposes a more direct method of comparing capital and RBC. We evaluate the capital and RBC ratios of US commercial banks from 2001 through 2011 and find the standard capital ratio to be a significantly better predictor of bank performance than the RBC ratio. The results have significant implications for US banking regulation.

Keywords: bank, capital, risk-based capital, regulation

JEL Classification: G21, G28, G32

Suggested Citation

Hogan, Thomas L. and Meredith, Neil R. and Pan, Xuhao (Harry), Evaluating Risk-Based Capital Regulation (January 30, 2013). Mercatus Center Working Paper No. 13-02. Available at SSRN: or

Thomas Hogan (Contact Author)

Troy University ( email )

Troy, AL
United States

Neil Meredith

West Texas A&M University ( email )

2501 4th Avenue
Canyon, TX 79016-0001
United States
806-651-2493 (Phone)

American Economic Association ( email )

2014 Broadway, Suite 305
Nashville, TN 37203
United States

Xuhao Pan

West Texas A&M University ( email )

Canyon, TX 79016
United States

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