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A Primer on Regulatory Bank Capital Adjustments

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  • Lubberink, Martien

Abstract

To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These regulatory adjustments vary with a bank’s solvency position. Low-solvency banks report values of Tier 1 capital that exceed book equity. They use regulatory adjustments to inflate regulatory solvency ratios such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. These results weaken the case for regulatory adjustments. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks to substituting equity for debt.

Suggested Citation

  • Lubberink, Martien, 2014. "A Primer on Regulatory Bank Capital Adjustments," MPRA Paper 55290, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:55290
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    Cited by:

    1. Fratzscher, Marcel & König, Philipp Johann & Lambert, Claudia, 2016. "Credit provision and banking stability after the Great Financial Crisis: The role of bank regulation and the quality of governance," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 113-135.
    2. Gropp, Reint & Mosk, Thomas & Ongena, Steven & Simac, Ines & Wix, Carlo, 2024. "Supranational Rules, National Discretion: Increasing Versus Inflating Regulatory Bank Capital?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 59(2), pages 830-862, March.

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    More about this item

    Keywords

    Keywords: Banking; Regulatory Capital; Solvency; Accounting.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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