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Risk-based capital regulation revisited: evidence from the early 2000s

Thomas L. Hogan (Johnson Center for Political Economy, Troy University, Troy, Alabama, USA)
Neil R. Meredith (Department of Accounting, Economics, and Finance, West Texas A&M University, Canyon, Texas, USA)
Xuhao (Harry) Pan (George Mason University, Fairfax, Virginia, USA)

Journal of Financial Regulation and Compliance

ISSN: 1358-1988

Article publication date: 11 May 2015

583

Abstract

Purpose

The purpose of this study is to replicate Avery and Berger’s (1991) analysis using data from 2001 through 2011. Although risk-based capital (RBC) regulation is a key component of US banking regulation, empirical evidence of the effectiveness of these regulations has been mixed. Among the first studies of RBC regulation, Avery and Berger (1991) provide evidence from data on US banks that new RBC regulations outperformed old capital regulations from 1982 through 1989.

Design/methodology/approach

Using data from the Federal Reserve’s Call Reports, the authors compare banks’ capital ratios and RBC ratios to five measures of bank performance: income, standard deviation of income, non-performing loans, loan charge-offs and probability of failure.

Findings

Consistent with Avery and Berger (1991), the authors find banks’ risk-weighted assets to be significant predictors of their future performance and that RBC ratios outperform regular capital ratios as predictors of risk.

Originality/value

The study improves on Avery and Berger (1991) by using an updated data set from 2001 through 2011. The authors also discuss some potential limitations of this method of analysis.

Keywords

Acknowledgements

The authors would like to thank the Mercatus Center at George Mason University for generously supporting this research.

Citation

Hogan, T.L., Meredith, N.R. and Pan, X.(H). (2015), "Risk-based capital regulation revisited: evidence from the early 2000s", Journal of Financial Regulation and Compliance, Vol. 23 No. 2, pp. 115-134. https://doi.org/10.1108/JFRC-02-2014-0006

Publisher

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Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

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