A Review of the Regulatory Impact Analysis of Risk-Based Capital and Related Liquidity Rules

Abstract

This paper reviews the cost-benefit analysis, or “regulatory impact analysis” (RIA), in US bank regulators’ risk-based capital (RBC) rule proposals. We review the principles of cost-benefit analysis and its application by US bank regulators. We provide a brief background on RBC rules and review the literature on their costs and benefits. We then evaluate 27 proposed RBC rules and related rules on bank liquidity. We find that nine of the 27 rules include RIAs. Five of the RIAs claim the proposed rule will create net benefits, but none provide quantitative evidence that the benefits exceed the costs. In two proposals, the evidence cited indicates the rules’ net benefits may actually be negative.