by Thomas Hogan, Neil Meredith, Xuhao Pan
February 05, 2013
Capital requirements are a primary component of US banking regulation. Since 1991, the Federal Reserve has used a “risk-based” method of capital regulation that attempts to account for the riskiness of various types of bank assets. However, evidence shows that this system has increased, rather than decreased, risk in the US banking system. In this policy brief, The Mercatus Center explains the fundamentals of risk-based capital (RBC) regulation and discuss some potential shortcomings of this system. They propose that the Fed end its use of RBC regulation and return to the use of simple capital ratios as measures of bank risk.