Risk-Based Capital Regulation and Bank Asset Allocations

In light of the financial crisis and subsequent regulatory efforts, some have called the Basel Accord framework for risk-based capital standards into question. Scholars, policymakers, and market participants have criticized the risk-weighting component of this regulation, and some of the negative impacts have been revealed.1 Further, there is no overwhelming evidence showing the benefits of these requirements. This paper offers preliminary evidence from US bank holding company (BHC) data that banks, on average, alter holdings of some assets after changes in risk-based capital requirements. If the portfolio effects of these regulations are present—but come with no benefit of increased stability—then policymakers should reconsider the current risk-based capital regime.

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