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Back to the Future: The Nature of Regulatory Capital Requirements

Author

Listed:
  • Mr. Ralph Chami
  • Mr. Thomas F. Cosimano
  • Emanuel Kopp
  • Ms. Celine Rochon

Abstract

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.

Suggested Citation

  • Mr. Ralph Chami & Mr. Thomas F. Cosimano & Emanuel Kopp & Ms. Celine Rochon, 2017. "Back to the Future: The Nature of Regulatory Capital Requirements," IMF Working Papers 2017/181, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2017/181
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    Cited by:

    1. is not listed on IDEAS
    2. Ghulame Rubbaniy & Ali Awais Khalid & Stathis Polyzos & Balqees Naser Almessabi, 2022. "Cyclicality of capital adequacy ratios in heterogeneous environment: A nonlinear panel smooth transition regression explanation," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(6), pages 1960-1979, September.
    3. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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