Connect with us

Hi, what are you looking for?

Editor's Pick

Bank Capital Standards

Peter Van Doren

bank

The Federal Reserve Bank recently proposed to liberalize capital standards for large banks. Since 2014, the eight largest banks have had to maintain capital that was at least 5 percent of their total assets. The change would reduce that ratio to a range of 3.5 percent to 4.5 percent, a reduction in capital requirements of $13 billion, or 1.4 percent at the holding company level.

After financial crises and bank failures, capital standards are always increased. As memories of the last crisis fade, capital standards are eased. The 2008 financial crisis is no exception.

Even though increased capital standards sound like an appropriate regulatory response to financial crises, they may not even work. According to Columbia Business School Professor Charles Calomiris, in December 2008, Citigroup had a very high regulatory capital ratio of 12 percent but a market value of equity relative to its market value of assets (MVE/MVA) below 2 percent, reflecting the market perception that it was insolvent.

Calomiris proposes linking prudential regulation to the economic value of bank equity. Banks should raise equity in the market whenever a medium-term moving average of their MVE/MVA falls below a threshold, say 10 percent.

You May Also Like

Editor's Pick

Chris Edwards I’ve described 10 ways that criminals steal from the food stamp program. This is an important issue because the program, run by...

Editor's Pick

Colleen Hroncich A microschool in a converted bus? Depending on your perspective, it may sound crazy, or it may sound amazing. To former public...

Editor's Pick

David J. Bier Student visas are the primary jumping-off point for most high-skilled immigrants to the United States. Immigrants study at America’s elite universities...

Editor's Pick

Justin Logan Trusty Defense and Foreign Policy Research Associate Ben Giltner and I have a piece in The Spectator pointing to some problems with...