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Risk-based capital and deposit insurance reform

  • Robert B. Avery
  • Allen N. Berger

Risk-based capital (RBC) is an important component of deposit insurance reform. This paper provides an empirical analysis of the new 1992 RBC bank standards, applying them to data on virtually all U.S. banks from 1982 to 1989. The data reveal strong associations between several measures of future bank performance (including bankruptcy) and the RBC relative risk weights. These associations suggest that the weights constitute a significant improvement over the old capital standards, although there are several instances in which the weights for specific categories appear to be out of line with the performance results. Tests of the informational value of passing or failing the new and old capital standards show that both have independent information, but that the new RBC standards better predict future bank performance problems. The data also indicate that, in contrast to the old standards, the RBC capital burden falls much more heavily on large banks. As a result, banks representing more than one-fourth of all bank assets would have failed the new RBC standards as of 1989. The new standards are also more stringent overall. More banks would have failed the new standards than the old ones, with larger average capital deficiencies.

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File URL: http://www.clevelandfed.org/research/Workpaper/1991/wp9101.pdf
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Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 9101.

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Date of creation: 1990
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Handle: RePEc:fip:fedcwp:9101
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  1. Lawrence M. Benveniste & Allen N. Berger, 1987. "Securitization with recourse: an instrument that offers uninsured bank depositors sequential claims," Research Papers in Banking and Financial Economics 97, Board of Governors of the Federal Reserve System (U.S.).
  2. Robert B. Avery & Allen N. Berger, 1988. "Risk-based capital and off-balance sheet activities," Proceedings 202, Federal Reserve Bank of Chicago.
  3. William F. Sharpe, 1977. "Bank Capital Adequacy, Deposit Insurance and Security Values, Part I," NBER Working Papers 0209, National Bureau of Economic Research, Inc.
  4. Sharpe, William F., 1978. "Bank Capital Adequacy, Deposit Insurance and Security Values," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 13(04), pages 701-718, November.
  5. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
  6. Frederick T. Furlong & Michael C. Keeley, 1991. "Capital regulation and bank risk-taking: a note (reprinted from Journal of Banking and Finance)," Economic Review, Federal Reserve Bank of San Francisco, issue Sum, pages 34-39.
  7. Keeley, Michael C. & Furlong, Frederick T., 1990. "A reexamination of mean-variance analysis of bank capital regulation," Journal of Banking & Finance, Elsevier, vol. 14(1), pages 69-84, March.
  8. Gorton, Gary & Santomero, Anthony M, 1990. "Market Discipline and Bank Subordinated Debt," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(1), pages 119-28, February.
  9. Avery, Robert B & Belton, Terrence M & Goldberg, Michael A, 1988. "Market Discipline in Regulating Bank Risk: New Evidence from the Capital Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(4), pages 597-610, November.
  10. Furlong, Frederick T. & Keeley, Michael C., 1989. "Capital regulation and bank risk-taking: A note," Journal of Banking & Finance, Elsevier, vol. 13(6), pages 883-891, December.
  11. Robert B. Avery & Allen N. Berger, 1990. "Loan commitments and bank risk exposure," Working Paper 9015, Federal Reserve Bank of Cleveland.
  12. Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
  13. Udell, Gregory F., 1989. "Loan quality, commercial loan review and loan officer contracting," Journal of Banking & Finance, Elsevier, vol. 13(3), pages 367-382, July.
  14. Lawrence M. Benveniste & Allen N. Berger, 1986. "An empirical analysis of standby letters of credit," Research Papers in Banking and Financial Economics 85, Board of Governors of the Federal Reserve System (U.S.).
  15. Flannery, Mark J., 1991. "Pricing deposit insurance when the insurer measures bank risk with error," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 975-998, September.
  16. Malcolm C. Alfriend, 1988. "International risk-based capital standard: history and explanation," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 28-34.
  17. Wall, Larry D. & Peterson, David R., 1987. "The effect of capital adequacy guidelines on large bank holding companies," Journal of Banking & Finance, Elsevier, vol. 11(4), pages 581-600, December.
  18. Robert B. Avery & Allen N. Berger, 1988. "Risk-based capital and off-balance sheet activities," Finance and Economics Discussion Series 35, Board of Governors of the Federal Reserve System (U.S.).
  19. Koehn, Michael & Santomero, Anthony M, 1980. " Regulation of Bank Capital and Portfolio Risk," Journal of Finance, American Finance Association, vol. 35(5), pages 1235-44, December.
  20. Ehud I. Ronn & Avinash K. Verma, 1988. "Risk-based capital adequacy standards for a sample of 43 major banks," Proceedings 192, Federal Reserve Bank of Chicago.
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