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Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994

Author

Listed:
  • Armen Hovakimian

    (Baruch College)

  • Edward J. Kane

    (Baruch College)

Abstract

Unless priced and administered appropriately, a governmental safety net enhances risk-shifting opportunities for banks. This paper quantifies regulatory efforts to use capital requirements to control risk-shifting by U.S. banks during 1985 to 1994 and investigates how much risk-based capital requirements and other deposit-insurance reforms improved this control. We find that capital discipline did not prevent large banks from shifting risk onto the safety net. Banks with low capital and debt-to-deposits ratios overcame outside discipline better than other banks. Mandates introduced by 1991 legislation have improved but did not establish full regulatory control over bank risk-shifting incentives. Copyright The American Finance Association 2000.

Suggested Citation

  • Armen Hovakimian & Edward J. Kane, 2000. "Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994," Journal of Finance, American Finance Association, vol. 55(1), pages 451-468, February.
  • Handle: RePEc:bla:jfinan:v:55:y:2000:i:1:p:451-468
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