Working Paper
Risk-Based Capital and Deposit Insurance Reform
Risk-based capital (RBC) is an important component of deposit insurance
reform. This paper provides an empirical analysis of the new 1992 RBC bank
standards, applying them to data on virtually all U.S. banks from 1982 to
1989. The data reveal strong associations between several measures of future
bank performance (including bankruptcy) and the RBC relative risk weights.
These associations suggest that the weights constitute a significant
improvement over the old capital standards, although there are several
instances in which the weights for specific categories appear to be out of
line with the performance results. Tests of the informational value of
passing or failing the new and old capital standards show that both have
independent information, but that the new RBC standards better predict future
bank performance problems. The data also indicate that, in constrast to the
old standards, the RBC capital burden falls much more heavily on large banks.
As a result, banks representing more than one-fourth of all bank assets would
have failed the new RBC standards as of 1989. The new standards are also more
stringent overall. More banks would have failed the new standards than the old
ones, with larger average capital deficiencies.
Suggested Citation
Avery, Robert B. , and Allen N. Berger. 1991. “Risk-Based Capital and Deposit Insurance Reform” Federal Reserve Bank of Cleveland, Working Paper No. 91-01. https://doi.org/10.26509/frbc-wp-199101
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