The Shadow Cost of Bank Capital Requirements

Abstract

How much would an increase in regulatory capital requirements cost banks? We estimate the shadow cost of capital requirements for banks using data on their participation in a costly regulatory loophole. The extent to which banks bypassed capital requirements, by providing liquidity guarantees to asset-backed commercial paper conduits, reveals their private compliance costs. We estimate that a ten percentage point increase in capital requirements would cost $2.2 billion a year for all banks that exploited the loophole combined, and no more than $3.7 billion for all US banks. The average cost per bank is $143 million, or 4 percent of annual profits. Lending interest rates would increase by 3 basis points and quantities would decrease by 1.5 percent.

Determinants of Financial Distress in Large Financial Institutions: Evidence From U.S. Bank Holding Companies

“…A U.S. BHC needs to report three separate capital ratios to the regulator: Tier 1 risk-based capital ratio, Total risk-based capital ratio (TRBCR), and LEV, whereby the regulator determines whether the bank is well-capitalized, adequately capitalized, or under-capitalized 3 3. According to Kisin and Manela (2015), a bank is regarded as well-capitalized if both of the following are true:…”

“…(b). Tier 1 risk-based capital ratio ≡ Tier 1 (core) capital as a percentage of risk-weighted assets ≥6%; Total risk-based (Kisin and Manela 2015). In our hypothesis, we use these three regulatory capital ratios as the alternative capital requirements to test the relation between them and both the DD and the Z-Score.…”

Intermediary asset pricing: New evidence from many asset classes

“…Many of the largest primary dealers in our sample are constrained by Basel capital requirements(Kisin and Manela, 2013), and potentially also by the SEC's net capital rule. Capital constraints are particularly costly during liquidity crises(Kashyap et al, 2008;Hanson et al, 2011;Koijen and Yogo, forthcoming;Kisin and Manela, 2013).11 For example, He and Krishnamurthy (2012) (page 757, Section 4.4.5) consider a setting in which the second shock affects the severity of agency problems when intermediaries contract with households. In equilibrium, a negative shock to agency frictions lowers the households' equity capital contribution, which drives the evolution of leverage and hence the pricing kernel in (2).…”

Bank leverage and profitability: Evidence from a sample of international banks

“…Berger and Bouwman (2013) show that equity improves the performance of medium and large banks especially during banking crises. On the contrary, Berger and Bonaccorsi di Patti (2006) find that a lower equity ratio is associated with higher profit efficiency for a cross section of US commercial banks over the period 1990–1995, while Kisin and Manela (2015) find very little relation between capital requirements and profitability. Calem and Robb (1999) and Haq and Heaney (2012) find that capital deficits tend to be positively associated with future ROA whereas capital surpluses tend to be strongly negatively associated with future ROA.…”