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How Basel III Changes Where Capital Sits: Nonbank Subsidiaries as Equity Reservoirs

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Abstract

When Basel III’s binding capital minimums took effect for U.S. banks in January 2015, a bank holding company (BHC) whose depository subsidiary fell short of the new standards had two options. It could raise fresh equity in external markets, a costly option. Or, if it owned equity-rich nonbank affiliates, it could simply move capital from one subsidiary to another. The second route satisfies the regulator, avoids issuance costs, and leaves consolidated equity exactly where it was. In this second post of our series, we show that this is precisely what organizationally complex BHCs did in response to higher capital requirements.

Suggested Citation

  • Nicola Cetorelli & Shohini Kundu, 2026. "How Basel III Changes Where Capital Sits: Nonbank Subsidiaries as Equity Reservoirs," Liberty Street Economics 20260716, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:103545
    DOI: 10.59576/lse.20260716
    Note: This post is the second in a three-part series on how bank regulation interacts with the organizational structure of banking firms. The first post documented that nonbank subsidiaries inside bank holding companies (BHCs) are large, equity-rich “reservoirs,” and that bank-level capital diverged sharply from consolidated capital after Basel III took effect in 2015. This post asks why, and traces the answer through the internal plumbing of the holding company. The series draws on the authors’ recent Staff Report, “Regulatory Arbitrage Within the Firm.”
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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