How Basel III Changes Where Capital Sits: Nonbank Subsidiaries as Equity Reservoirs

Nicola Cetorelli and Shohini Kundu ()
Additional contact information
Shohini Kundu: https://www.anderson.ucla.edu/faculty-and-research/finance/faculty/kundu

No 20260716, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: When Basel III’s binding capital minimums took effect for U.S. banks in January 2015, a bank holding company (BHC) whose depository subsidiary fell short of the new standards had two options. It could raise fresh equity in external markets, a costly option. Or, if it owned equity-rich nonbank affiliates, it could simply move capital from one subsidiary to another. The second route satisfies the regulator, avoids issuance costs, and leaves consolidated equity exactly where it was. In this second post of our series, we show that this is precisely what organizationally complex BHCs did in response to higher capital requirements.

Keywords: banks; nonbanks; bank holding companies (BHCs); regulation; arbitrage; boundaries of the firm (search for similar items in EconPapers)
JEL-codes: G21 G23 G28 G38 (search for similar items in EconPapers)
Date: 2026-07-16
Note: This post is the second in a three-part series on how bank regulation interacts with the organizational structure of banking firms. The first post documented that nonbank subsidiaries inside bank holding companies (BHCs) are large, equity-rich “reservoirs,” and that bank-level capital diverged sharply from consolidated capital after Basel III took effect in 2015. This post asks why, and traces the answer through the internal plumbing of the holding company. The series draws on the authors’ recent Staff Report, “Regulatory Arbitrage Within the Firm.”
References: Add references at CitEc
Citations:

Downloads: (external link)
https://libertystreeteconomics.newyorkfed.org/2026 ... s-equity-reservoirs/ Full text (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednls:103545

Ordering information: This working paper can be ordered from

DOI: 10.59576/lse.20260716

Access Statistics for this paper

More papers in Liberty Street Economics from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().