Risk-based capital regulation
revisited: evidence from the
Thomas L. Hogan
Johnson Center for Political Economy, Troy University, Troy,
Neil R. Meredith
Department of Accounting, Economics, and Finance,
West Texas A&M University, Canyon, Texas, USA, and
Xuhao (Harry) Pan
George Mason University, Fairfax, Virginia, USA
Purpose – The purpose of this study is to replicate Avery and Berger’s (1991) analysis using data from
2001 through 2011. Although risk-based capital (RBC) regulation is a key component of US banking
regulation, empirical evidence of the effectiveness of these regulations has been mixed. Among the rst
studies of RBC regulation, Avery and Berger (1991) provide evidence from data on US banks that new
RBC regulations outperformed old capital regulations from 1982 through 1989.
Design/methodology/approach – Using data from the Federal Reserve’s Call Reports, the authors
compare banks’ capital ratios and RBC ratios to ve measures of bank performance: income, standard
deviation of income, non-performing loans, loan charge-offs and probability of failure.
Findings – Consistent with Avery and Berger (1991), the authors nd banks’ risk-weighted assets to
be signicant predictors of their future performance and that RBC ratios outperform regular capital
ratios as predictors of risk.
Originality/value – The study improves on Avery and Berger (1991) by using an updated data set
from 2001 through 2011. The authors also discuss some potential limitations of this method of analysis.
Keywords Banking, Bank performance, Capital, Bank failure, Bank regulation, Risk-based capital
Paper type Research paper
The 2008 nancial crisis has created great turmoil regarding the stability of the banking
sector and the effectiveness of nancial regulation. Economists have differing opinions
about the causes of the crisis (Crotty, 2009;Acharya and Richardson, 2009;Obstfeld and
Rogoff, 2009) and propose different solutions including increasing bank capital (Admati
et al., 2011), better corporate governance (Peni and Vähämaa 2012) and increasing
transparency in the banking system (Lo, 2009). One institution blamed as a potential
source of the nancial crisis is the system of risk-based capital (RBC) regulations based
on the Basel Accords. RBC regulations have been linked to the build-up of risk in the
The authors would like to thank the Mercatus Center at George Mason University for generously
supporting this research.
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Journalof Financial Regulation
Vol.23 No. 2, 2015
©Emerald Group Publishing Limited