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Regulatory capital

The United States and several other countries are members of the Basel Committee, a global initiative to help regulate banks and address regulators’ concerns about the way banks hold capital. In fact, the committee has published specific standards for capital requirements for member countries to implement.

Traditionally, banks have reduced the capital they’re required to hold by taking advantage of the lack of risk restrictions assigned to government bonds. But countries such as Greece have shown that government bonds do have some risk attached to them, so regulators hope to change this practice.

We can track relevant changes by looking at data in FRED: specifically, the IMF’s calculation of the ratios of regulatory capital to risk-weighted assets for several countries, which are part of their set of financial soundness indicators.

The data show similar trends in the United States and euro area: The recent recession, which underscored the risk associated with billions of dollars of bank assets, caused a large spike in the amount of capital that banks were holding. However, this amount has declined sharply in the recovery period. Interestingly, the ratios of regulatory capital actually seemed to decrease during the 2001 recession—which points to differences in the nature of the two recessions.

How this graph was created: Search for “Regulatory Capital to Risk-Weighted Assets for United States” and change the units to “Percent, Change, Percent.” Click on “add data series” and add “Regulatory Capital to Risk-Weighted Assets for Euro Area.”

Suggested by Abhinav Chhabra

View on FRED, series used in this post: DDSI05EZA156NWDB, DDSI05USA156NWDB

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