A Primer on Regulatory Bank Capital Adjustments

Martien Lubberink

MPRA Paper from University Library of Munich, Germany

Abstract: To calculate regulatory capital ratios, banks have to apply adjustments to book equity. These regulatory adjustments vary with a bank’s solvency position. Low-solvency banks report values of Tier 1 capital that exceed book equity. They use regulatory adjustments to inflate regulatory solvency ratios such as the Tier 1 leverage ratio and the Tier 1 risk-based capital ratio. In contrast, highly solvent banks report Tier 1 capital that is lower than book equity. These banks adjust their solvency ratios downward for prudential reasons, despite their resilient solvency levels. These results weaken the case for regulatory adjustments. The decreasing relationship between regulatory adjustments and bank solvency reflects the cost of deleveraging, a cost that demonstrates the resistance of banks to substituting equity for debt.

Keywords: Keywords: Banking; Regulatory Capital; Solvency; Accounting. (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2014-03-30
New Economics Papers: this item is included in nep-acc, nep-ban and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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