Evaluating Risk-Based Capital Regulation

Mercatus Center Working Paper No. 13-02

39 Pages Posted: 1 Feb 2013

See all articles by Thomas L. Hogan

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

Neil R. Meredith

West Texas A&M University

Xuhao Pan

West Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: January 30, 2013

Abstract

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, Evaluating Risk-Based Capital Regulation (January 30, 2013). Mercatus Center Working Paper No. 13-02. Available at SSRN: https://ssrn.com/abstract=2209374 or http://dx.doi.org/10.2139/ssrn.2209374

Thomas L. Hogan (Contact Author)

Rice University - Baker Institute for Public Policy ( email )

6100 Main Street, MS-40
Houston, TX 77005
United States

Neil R. Meredith

West Texas A&M University ( email )

2501 4th Avenue
WTAMU Box 60187
Canyon, TX 79016-0001
United States
806-651-2493 (Phone)

HOME PAGE: http://https://www.wtamu.edu/academics/neil-meredith-bio.aspx

Xuhao Pan

West Texas A&M University ( email )

Canyon, TX 79016
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
139
rank
169,228
Abstract Views
748
PlumX Metrics