Risk-Based Capital, Portfolio Risk, and Bank Capital: A Simultaneous Equations Approach (WP 94-6)

Abstract

This paper examines the impact the recently implemented risk-based standards have had on both bank capital and portfolio risk. To date, little if any attention has focused on how the risk-based capital standards have impacted bank risk and capital levels.

Building on previous research, this paper uses a three-stage least squares (3SLS) model to analyze the relationship between bank capital, portfolio risk, and the risk-based capital standards. The results suggest that the risk-based capital standards had a significant impact on capital and risk levels in well-capitalized banks, but little impact on undercapitalized banks.

Authors

Kevin Jacques and Peter Nigro