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Evaluating risk‐based capital regulation
Author(s) -
Hogan Thomas L.,
Meredith Neil R.,
Pan Xuhao Harry
Publication year - 2018
Publication title -
review of financial economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.347
H-Index - 41
eISSN - 1873-5924
pISSN - 1058-3300
DOI - 10.1016/j.rfe.2017.10.003
Subject(s) - capital adequacy ratio , economics , capital requirement , capital (architecture) , risk adjusted return on capital , econometrics , sample (material) , economic capital , regression , regression analysis , bank regulation , simple linear regression , monetary economics , statistics , financial capital , human capital , mathematics , capital formation , microeconomics , profit (economics) , chemistry , archaeology , chromatography , incentive , history , economic growth
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.