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Bank Capital and Liquidity Regulation

Complex banking regulations are only justified when the complexity is necessary to mitigate the problem that requires a regulatory response. The Basel-based capital regulations adopted by the U.S. bank regulatory agencies are increasingly complex, and yet there is scant evidence that the complexity is necessary to meet the primary regulatory goals articulated in Congressional legislation. In fact, Basel-based regulatory capital ratios have been used to implement prompt corrective action legislation, but they have a terrible record of performance. Simpler alternatives such as nonperforming asset coverage ratio (or NACR)—can identify weak and failing depository institutions far more efficiently than Basel-based regulatory capital measures. Academic studies suggest that deposit insurance fund losses could be reduced substantially by simply replacing Basel regulatory capital ratios with the NACR in the prompt corrective action rules. New minimum total loss absorbing capacity (TLAC) rules will make the capital regulations even more complex for large bank holding companies.

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