Bank Capital Regulation by Enforcement: An Empirical Study

Improving commercial bank capital requirements has been a top priority on the regulatory agenda since the beginning of the 2008 financial crisis Unfortunately some of the information necessary to make informed decisions about capital regulation has been missing Existing regulations establish numerical capital requirements Regulators however have significant discretion to set higher capital requirements for individual banks In considering necessary reforms regulators often focus on specific numerical requirements but sometimes ignore the structure of the regulations and discretionary enforcement efforts Without clear information about discretionary capital enforcement actions it is impossible to make informed judgments about the current capital regulation system This Article provides a more complete picture of discretionary capital enforcement It reports an empirical study of all publicly available formal capital enforcement actions between 1993 and 2010 The data compiled from more than 2300 enforcement actions reveal four significant insights First the number of capital enforcement actions has dramatically increased during the current economic downturn Second an increasing number of banks are subject to individual capital requirements “ requirements that are higher than the requirements specified in statutes and regulations Third the data suggest that enforcement rates are not consistent among bank regulators In particular the Federal Reserve is less likely than other regulators to bring serious capital enforcement actions and is less likely to increase capital requirements Fourth the data show a near complete absence of capital enforcement actions issued to the largest banks Because the study clearly reveals an increase in discretionary capital enforcement actions the Article examines the proper role of this discretionary enforcement It concludes that a capital regulation system that relies heavily on discretion is troublesome Discretionary capital enforcement is often ineffective and costly Moreover the focus on individual bank conditions can blind regulators to macroeconomic problems Instead policymakers should work to create capital rules that are sufficient without significant discretionary capital enforcemen