Capital Adequacy and the Growth of U.S. Banks
The frequency and mounting cost of bank and thrift failures and their role in depleting the deposit insurance funds has caused bank regulators in the United States to increasingly emphasize capital requirements. The most recent step taken to improve bank capital adequacy was in 1990 when U.S. regulators began phasing in risk-based capital guidelines based on international standards negotiated under the auspices of the Bank for International Settlements (BIS). By year-end 1992, commercial banks in the major industrial countries will face capital requirements at least as strict as the BIS requirements. While the implementation of risk-based capital standards has been the subject of considerable discussion. another change in capital requirements for U.S. commercial banks has received much less attention. In 1990. U.S. regulators replaced the primary capital ratio. previously the principal measure of capital adequacy. with the "tier 1 leverage ratio"--the ratio of tier 1 equity to total assets. This leverage limit was established as a supplement to the risk-based guidelines to "place a constraint on the maximum degree to which a banking organization can leverage its equity capital base."