Back to the Future: The Nature of Regulatory Capital Requirements

By Ralph Chami, Thomas F. Cosimano, Emanuel Kopp, Celine Rochon

August 4, 2017

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Ralph Chami, Thomas F. Cosimano, Emanuel Kopp, and Celine Rochon. Back to the Future: The Nature of Regulatory Capital Requirements, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

This paper compares the current regulatory capital requirements under the Dodd-Frank Act (DFA) and the 10-percent leverage ratio, as proposed by the U.S. Treasury and the U.S. House of Representatives' Financial CHOICE Act (FCA). We find that the majority of U.S. banks would not qualify for an "off-ramp"option—where regulatory relief is offered to FCA qualifying banks (QBOs)—unless considerable amounts of capital are added, and that large banks are much closer to the proposed leverage threshold and, therefore, are more likely to stand to gain from regulatory relief. The paper identifies an important moral hazard problem that arises due to the QBO optionality, where banks are likely to increase the riskiness of their asset portfolio and qualify for the FCA “off-ramp” relief with unintended effects on financial stability.

Subject: Banking, Capital adequacy requirements, Financial institutions, Financial regulation and supervision, Financial statements, Loans, Public financial management (PFM), Securities, Systemically important financial institutions

Keywords: Bank, Bank New York mellon, Banking sector, Capital adequacy, Capital adequacy requirements, Capital requirement, Dodd-Frank Act, Financial CHOICE Act, Financial statements, Global, Leverage ratio, Liquidity standards, Loans, Moral hazard, Portfolio composition, Regulatory arbitrage, Regulatory requirements, RWA density, Securities, Systemically important financial institutions, WP

Publication Details

Pages:

20
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/181
Stock No:

WPIEA2017181
ISBN:

9781484313817
ISSN:

1018-5941

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