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Back to the Future: The Nature of Regulatory Capital Requirements
Author:
Mr. Ralph Chami
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,
Mr. Thomas F. Cosimano null

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Emanuel Kopp
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Ms. Celine Rochon
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Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 181
Language:
English
Publication Date:
04 Aug 2017
DOI:
https://doi.org/10.5089/9781484313817.001
ISBN:
9781484313817
ISSN:
1018-5941
Pages:
20
Keywords:
WP; Financial CHOICE Act; leverage ratio; bank; Banking sector; regulatory requirements; Dodd-Frank Act; capital adequacy; liquidity standards; moral hazard; regulatory arbitrage; RWA density; portfolio composition; capital requirement; bank New York mellon; Systemically important financial institutions; Securities; Loans; Capital adequacy requirements; Financial statements; Global
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper compares the current regulatory capital requirements under the Dodd-Frank Act (DFA) and the 10-percent leverage ratio, as proposed by the U.S. Treasury and the U.S. House of Representatives' Financial CHOICE Act (FCA). We find that the majority of U.S. banks would not qualify for an "off-ramp"option—where regulatory relief is offered to FCA qualifying banks (QBOs)—unless considerable amounts of capital are added, and that large banks are much closer to the proposed leverage threshold and, therefore, are more likely to stand to gain from regulatory relief. The paper identifies an important moral hazard problem that arises due to the QBO optionality, where banks are likely to increase the riskiness of their asset portfolio and qualify for the FCA “off-ramp” relief with unintended effects on financial stability.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund