Bank capital requirements and federal reserve membership

Abstract

In recent years, questions of bank capital adequacy and the capital standards of bank regulatory agencies have attracted considerable attention. At the same time, much interest has also focused on the opportunity cost of Federal Reserve System (FRS) membership attributable to differences between FRS and state reserve requirements. One issue that has received little attention, however, is whether bank capital requirements may also vary between member and nonmember banks so as to offset or augment the cost of FRS membership due to FRS-state reserve requirement differences. Perhaps one reason why this issue has been largely ignored is that it presumes that capital requirements imposed by bank regulators are generally effective in influencing bank capital structures, a presumption which was seriously challenged by Peltzman [9]. Recently, however, Mingo [8] has refuted Peltzman's findings with evidence that bankers do respond positively to examiners' calls for additional capital. In that case, and in view of the recent accelerating pattern of membership attrition from the FRS, 1 it seems appropriate to give further consideration to the question of whether bank capital requirements may vary between member and nonmember banks with an attendant variance in the attractiveness of FRS membership. This paper explores this issue by looking at differences in the capital ratios of member and nonmember banks, holding other variables con-