A Primer on the Evolution and Complexity of Bank Regulatory Capital Standards

Abstract

Bank regulators consider minimum capital standards essential for promoting well-functioning banking systems. Despite their existence, however, such standards have been insufficient to prevent periodic disruptions in the banking sectors of various countries. The most recent disruption was the global banking crisis of 2007–2009. After the crisis, bank capital requirements have increased and become more complex. Clearly, capital requirements are important as a first line of defense in ensuring safer and sounder banking industries. Given the importance of capital requirements, this paper explains and documents: (1) the extent to which capital requirements have evolved, becoming higher and more complex, and (2) how all the regulatory capital ratios that now exist to account for differences among banks, such as asset size and business model, do not provide equally valuable information about whether a bank is adequately capitalized. A simple minimum regulatory capital ratio will likely promote a more stable banking system.