Abstract
Risk-based capital (RBC) ratios are an important component of US banking regulation, yet empirical evidence on the effectiveness of RBC regulation has been mixed. Avery and Berger (1991) find that the RBC ratio improves upon the standard capital ratio of equity over assets. This paper identifies some potential flaws in the Avery and Berger (1991) methodology and proposes a more direct method of comparing capital and RBC. We evaluate the capital and RBC ratios of US commercial banks from 2001 through 2011 and find the standard capital ratio to be a significantly better predictor of bank performance than the RBC ratio. The results have significant implications for US banking regulation.
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