Reassessing risk-based capital in the 1990s: Encouraging consolidation and productivity

  • John C. CoatesIV
Part of the The New York University Salomon Center Series on Financial Markets and Institutions book series (SALO, volume 3)


This paper reassesses the risk-based capital rules, as they have been implemented in the 1990s, in light of ongoing consolidation in the banking industry. After briefly reviewing the theory behind the risk-based capital rules, the paper observes that although the risk-based capital rules have not been generally binding on US banks, they soon may become binding as a result of market forces that are pressuring banks to take steps that result in lower risk-based capital ratios. The paper then argues against past and likely future proposals to raise capital minimums on the ground that higher ratios would interfere with the healthy, ongoing consolidation in the banking industry. Next, the paper briefly reviews the status and treatment of three types of risk under the risk-based capital rules — concentration risk, innovation risk and acquisition risk — and argues that current rules perversely encourage the most risky type of bank growth (product innovation) while discouraging the least risky type of bank growth (acquisitions that produce greater geographic diversification). The paper concludes by calling for a re-evaluation of the way in which the risk-based capital rules apply to acquisitions, with a view toward better discriminating between risk-increasing and risk-decreasing transactions.


Supra Note Large Bank Small Bank Capital Ratio Bank Merger 
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© Springer Science+Business Media Dordrecht 1998

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  • John C. CoatesIV

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