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A Primer on Regulatory Bank Capital Adjustments

60 Pages Posted: 4 Aug 2013 Last revised: 24 Mar 2014

Martien Jan Peter Lubberink

Victoria University of Wellington - School of Accounting and Commercial Law

Date Written: March 24, 2014

Abstract

To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These adjustments vary with a bank’s solvency position: Low solvency banks report values of Tier 1 regulatory capital that exceed book equity. These banks benefit from regulatory adjustments to inflate important regulatory solvency ratios, such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks against substituting equity for debt. Therefore, the results of this paper weaken the case for regulatory adjustments.

Keywords: Banking, Regulatory Capital, Solvency, Accounting

JEL Classification: E58, G21, G28, M41

Suggested Citation

Lubberink, Martien Jan Peter, A Primer on Regulatory Bank Capital Adjustments (March 24, 2014). 26th Australasian Finance and Banking Conference 2013. Available at SSRN: https://ssrn.com/abstract=2305052 or http://dx.doi.org/10.2139/ssrn.2305052

Martien Lubberink (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

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