Evaluating Risk-Based Capital Regulation

32 Pages Posted: 10 Nov 2017 Last revised: 13 Nov 2017

Thomas L. Hogan

Rice University - Baker Institute for Public Policy

Neil R. Meredith

West Texas A&M University; American Economic Association

Xuhao Pan

West Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: November 7, 2017

Abstract

This paper evaluates the effectiveness of risk-based capital (RBC) regulation and challenges some evidence from the well-known study by Haldane and Madouros (2012). We reconsider the evidence on the relationship between RBC ratios and failures of US banks from Haldane and Madouros (2012) and find their results are not robust to changes in the sample period or regression model. Using data on US commercial banks from 2000 through 2015 and an improved regression model, we compare banks’ RBC ratios and simple capital ratios as predictors of bank risk. We find simple capital ratios to be significantly better than complex RBC ratios as predictors of bank risk.

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 (November 7, 2017). Review of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3067008

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
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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