Capital regulations, supervision and the international harmonization of bank capital ratios

Abstract

In recent decades, despite the Basel Committee's effort to develop internationally uniform regulatory capital standards, the capital ratios of banks across countries continue to exhibit significant differences. This paper examines the fundamental question of whether, given a uniform regulatory capital standard, regulators should expect similar banks to exhibit similar risk-based capital ratios. More specifically, this study develops a one-period theoretical model to examine the level playing field argument in light of not only uniform regulatory capital standards but also differences in bank supervision. The results of the theoretical model suggest that even with an internationally uniform risk-based capital requirement, it is unreasonable to expect banks in different countries to hold similar capital ratios. This occurs, in part, because regulators have discretion in how they apply the risk-based capital standards. Furthermore, the results suggest that a necessary condition for banks to exhibit similar capital ratios is that uniform capital requirements must be accompanied by a uniform stringency and application of regulatory supervision.