Do Tougher Bank Capital Requirements Matter? New Evidence from the Eighties

39 Pages Posted: 2 Sep 2001

Date Written: July 23, 2001

Abstract

In contrast to existing research, I find that tougher capital requirements were probably not responsible for the increase in capital ratios throughout the 1980s. Banks with low capital ratios tended to mean-revert well before any change in policy, and did not raise their capital ratios any faster after the policy change relative to better-capitalized banks. These conclusions are unchanged when exploiting a natural experiment - the plausibly exogenous elimination of differences across Federal Reserve System membership status in leverage requirements for community banks in 1985. I argue that these results are consistent with the presence of market-based incentives for banks to hold capital so that existing regulatory capital requirements were not binding.

Keywords: Bank capital requirements, moral hazard, bank regulation

JEL Classification: E53, G21, G18

Suggested Citation

Ashcraft, Adam B., Do Tougher Bank Capital Requirements Matter? New Evidence from the Eighties (July 23, 2001). Available at SSRN: https://ssrn.com/abstract=281633 or http://dx.doi.org/10.2139/ssrn.281633

Adam B. Ashcraft (Contact Author)

Federal Reserve Bank of New York ( email )

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New York, NY 10045-0001
United States
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