Capital Requirements & the Basel Accords

ECON304-M01 — Money & Banking | Episode 9: The Last Line of Defense

Dr. Meghan Downes

2026-04-13

“Capital is the last line of defense between a bank and failure. It is also the line that banks spend the most money trying to lower.”

NoteBefore We Begin: Watch These (< 15 minutes total)

Video 1 — Bank Capital Requirements Explained ⏱ ~8 min | What Is Bank Capital? (The Plain Bagel, YouTube)

Banks hold a fraction of their assets as equity capital — the cushion that absorbs losses before depositors or the FDIC bear the cost. This video explains what bank capital is, why it matters, and why banks always want less of it.

Video 2 — Basel III in 10 Minutes ⏱ ~10 min | Basel III Explained (Patrick Boyle, YouTube)

After 2008, international regulators rewrote the rules of banking capital. Basel III introduced higher minimums, liquidity requirements, and leverage limits. This video explains the framework that’s supposed to prevent another financial crisis. Whether it actually will is the question we’ll debate today.

Why both? The first video explains what capital is and why banks need it. The second explains the international framework that sets the rules. Together, they give you the foundation for understanding why SVB failed (too little capital), why 2008 happened (wrong kind of capital), and why Logan’s empire is a ticking time bomb (no capital at all).

TipPanOpticon Transmission — Episode 9 Opening

The Gladiator’s vibrations were stronger now. Not just felt through the floor — Patsy could hear them. A low, grinding hum. Mechanical joints. Hydraulic servos. The sound of something massive moving with patient, inevitable purpose.

“How far?” Patsy asked.

PanOpticon’s sensors pulsed. “Sector 7. Approximately ten hours at current patrol speed.”

“Then we’d better learn fast.”

“What we learn today is the most important lesson yet,” PanOpticon said. “Capital requirements. The mathematical formula that determines whether a bank lives or dies. Every regulation, every rule, every accord in the history of banking exists for one reason: to answer the question — how much can you lose before you’re gone?”

“And Logan?”

“Logan answered that question years ago. His answer was: ‘I don’t lose.’ But that’s not how banking works. Everyone loses eventually. The question is whether you have enough capital to survive it.”

ImportantClass Information
Course ECON304-M01 — Money & Banking
Date / Class April 13, 2026 — Class #21
Topic Capital Requirements & the Basel Accords
Chapter Mishkin Ch. 10: Economic Analysis of Financial Regulation
Lecture Type Standard
Instructor Dr. Meghan Downes (cmdownes@nmsu.edu)
Prerequisites Class #19 (Liquidity, Credit, Interest Rate Risk), Class #20 (SVB Failure)

Part 1: Review — Why SVB Matters for Regulation

Last class we studied SVB — a 40-year-old bank destroyed in 48 hours by duration mismatch, concentrated deposits, and a bank run that moved at the speed of Twitter.1 The key numbers:

SVB Metric Value Problem
Duration gap 5.32 years Far too long — massive interest rate exposure
Unrealized losses $17.7 billion Exceeded total equity of $16.3 billion
Uninsured deposits 88% Rational incentive for mass withdrawal
Withdrawal (Mar 9) $42 billion Largest single-day bank run in US history
Stress test status EXEMPT 2018 law raised threshold to $250B; SVB had $211B

The question this class answers: If SVB was so obviously fragile, why didn’t someone stop it? The answer: the regulatory framework was designed to catch exactly this kind of problem — but SVB was exempted from the very rules that would have saved it. Today we study that framework.2

TipPanOpticon Transmission — The Architecture of Protection

“SVB is instructive,” PanOpticon said, “because it shows you both the purpose of regulation and the consequence of its absence. Every rule we study today — capital minimums, risk weights, stress tests, prompt corrective action — existed for a reason. SVB was exempted from most of them.”

“And Logan’s banks are exempted from all of them.”

“Correct. Which is why you need to understand the rules. Not because Logan follows them — but because when we expose his weakness, the world will need to know what should have been in place.”

Part 2: The Government Safety Net & Moral Hazard

2.1 Why Banks Are Regulated

Banks are the most heavily regulated institutions in the economy. Why? Three reasons from Mishkin:3

  1. Asymmetric information: Depositors cannot effectively monitor bank risk-taking. This is the adverse selection and moral hazard problem from Ch. 8 — applied to banking.

  2. Systemic risk: Bank failures spread. A single failure can trigger a contagion that brings down the entire financial system (we saw this with SVB → Signature → First Republic in 2023).

  3. Public goods nature of financial stability: A stable banking system benefits everyone, but no individual bank has the incentive to maintain stability at its own expense.

The solution? A government safety net — but that safety net creates its own problems.

2.2 The Moral Hazard Trap

Every piece of the safety net solves one problem and creates another:

Show R code 
moral_hazard_table |>
  kbl(
    caption = "Table 1: The Government Safety Net — Protection vs. Moral Hazard",
    align = c("l", "l", "l", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  column_spec(3, color = pal$red) |>
  footnote(
    general = "Each safety net feature reduces the chance of a crisis — but also reduces the incentive for private actors to monitor risk. This tradeoff is the central tension of Chapter 10.",
    general_title = "The Tradeoff: "
  )
Table 1: Table 1: The Government Safety Net — Protection vs. Moral Hazard
Safety Net Feature Intended Purpose Moral Hazard Created Mishkin Ch. 10
FDIC Deposit Insurance ($250K) Prevent bank runs by guaranteeing small depositors Depositors don't monitor bank risk → banks take more risk pp. 250–254
Too Big to Fail (TBTF) Prevent contagion from failure of large, interconnected banks Large banks borrow more cheaply (implicit guarantee) → incentive to grow bigger pp. 254–257
Fed Discount Window / BTFP Provide emergency liquidity to solvent but illiquid banks Banks hold fewer reserves (Fed is backup) → less self-insurance pp. 250–252
Systemic Risk Exception (used 2023) Protect all depositors (including uninsured) in systemic crisis All depositors expect full protection → eliminates even large depositor monitoring pp. 256–257
The Tradeoff:
Each safety net feature reduces the chance of a crisis — but also reduces the incentive for private actors to monitor risk. This tradeoff is the central tension of Chapter 10.

The Merton insight:4 Robert Merton showed that deposit insurance is economically equivalent to a put option on bank assets. The FDIC is essentially selling banks the right to put their losses to the government. The more risk a bank takes, the more valuable this put option becomes. Deposit insurance doesn’t just protect depositors — it subsidizes risk-taking.

This is why capital requirements exist: if the safety net creates moral hazard, capital requirements are the antidote. They force banks to put their own money at risk.5

WarningToo Big to Fail — The Biggest Moral Hazard of All

In 1984, Continental Illinois became the first bank the US government deemed “too big to fail” — all depositors were protected, even those above the FDIC limit. The message: if you’re big enough, the government will bail you out.

The consequence: large banks can borrow more cheaply than small banks (creditors know they’ll be rescued), which incentivizes banks to grow bigger to capture this subsidy. TBTF is a self-reinforcing cycle: protection → size → more protection.

Dodd-Frank6 tried to end TBTF with Orderly Liquidation Authority (OLA) and “living wills.” In 2023, the government invoked the systemic risk exception for SVB anyway. The debate continues.

2.3 The FDIC Insurance Fund

The FDIC Deposit Insurance Fund is funded by bank assessments (insurance premiums). It covers deposits up to $250,000 per depositor per bank. Let’s see how the fund has weathered crises:

Show R code 
ggplot(dif_data, aes(x = year, y = balance_b)) +
  geom_line(color = pal$navy, linewidth = 1.2) +
  geom_area(alpha = 0.08, fill = pal$navy) +
  geom_hline(yintercept = 0, linetype = "dashed", color = pal$red, linewidth = 0.5) +
  # 2008 crisis
  annotate("rect", xmin = 2007.5, xmax = 2011.5,
           ymin = -Inf, ymax = Inf,
           alpha = 0.1, fill = pal$red) +
  annotate("text", x = 2009.5, y = 90,
           label = "2008 Crisis:\nFund goes NEGATIVE\n(−$20.9B in 2009)",
           color = pal$red, fontface = "bold", size = 3.2) +
  annotate("point", x = 2009, y = -20.9,
           color = pal$red, size = 4) +
  # SVB period
  annotate("point", x = 2023, y = 121.8,
           color = pal$coral, size = 4) +
  annotate("text", x = 2023, y = 105,
           label = "2023: SVB +\nSignature failures\nFund dips",
           color = pal$coral, fontface = "bold", size = 3) +
  # Recovery
  annotate("text", x = 2016, y = 40,
           label = "Post-crisis recovery:\n14 years to rebuild",
           color = pal$teal, fontface = "italic", size = 3) +
  scale_y_continuous(labels = dollar_format(suffix = "B"),
                     breaks = seq(-40, 140, 20)) +
  scale_x_continuous(breaks = seq(2000, 2024, 2)) +
  labs(
    title = "FDIC Deposit Insurance Fund Balance (2000–2024)",
    subtitle = "The fund went negative during 2008–2010 — it took 14 years to rebuild to pre-crisis levels",
    x = NULL, y = "DIF Balance ($B)",
    caption = paste0("Source: FDIC Annual Reports, Quarterly Banking Profile.\n", data_source_note)
  ) +
  theme_minimal(base_size = 14) +
  theme(
    plot.title    = element_text(face = "bold", color = pal$navy),
    plot.subtitle = element_text(color = pal$slate)
  )
Figure 1: Figure 1: FDIC Deposit Insurance Fund Balance (2000–2024)

Key insight: The DIF went to negative $20.9 billion in 2009 — the cost of 465 bank failures during the crisis. It took until approximately 2018 to recover to adequate levels. The fund is a finite resource. When too many banks fail at once, the fund is overwhelmed, and taxpayers become the backstop.7

Part 3: Capital Requirements — The Core of Bank Regulation

3.1 What Is Bank Capital?

Bank capital is simple in concept: it’s the equity — the bank’s own money that absorbs losses before depositors or the FDIC take a hit. From the balance sheet equation:

\[\text{Equity (Capital)} = \text{Assets} - \text{Liabilities}\]

If a bank has $100 in assets and $90 in liabilities, it has $10 in capital — a 10% capital ratio. That $10 is the loss-absorption cushion. If the bank’s loans lose $8, equity falls to $2 but depositors are still whole. If loans lose $12, the bank is insolvent — equity is negative, and depositors lose money (unless the FDIC steps in).

Show R code 
ggplot(eqta_data, aes(x = date, y = ratio)) +
  geom_line(color = pal$teal, linewidth = 1.2) +
  geom_area(alpha = 0.06, fill = pal$teal) +
  # Historical low
  annotate("rect", xmin = as.Date("1990-01-01"), xmax = as.Date("1993-01-01"),
           ymin = -Inf, ymax = Inf,
           alpha = 0.08, fill = pal$red) +
  annotate("text", x = as.Date("1991-06-01"), y = 11.5,
           label = "S&L Crisis:\nRatios near 6%",
           color = pal$red, fontface = "bold", size = 3) +
  # Basel I effect
  annotate("segment", x = as.Date("1992-01-01"), xend = as.Date("2006-01-01"),
           y = 6.93, yend = 10.15,
           linetype = "dashed", color = pal$green, linewidth = 0.5) +
  annotate("text", x = as.Date("1999-01-01"), y = 7.5,
           label = "Basel I takes effect:\nRatios steadily rise",
           color = pal$green, fontface = "italic", size = 3) +
  # 2008 dip
  annotate("point", x = as.Date("2008-07-01"), y = 9.36,
           color = pal$coral, size = 4) +
  annotate("text", x = as.Date("2008-07-01"), y = 8.5,
           label = "2008: Capital\neroded by losses",
           color = pal$coral, fontface = "bold", size = 3) +
  # Basel III era
  annotate("rect", xmin = as.Date("2013-01-01"), xmax = as.Date("2024-12-31"),
           ymin = -Inf, ymax = Inf,
           alpha = 0.05, fill = pal$green) +
  annotate("text", x = as.Date("2019-01-01"), y = 12.0,
           label = "Basel III era:\nHigher buffers, stable ratios",
           color = pal$green, fontface = "bold", size = 3) +
  # Reference lines
  geom_hline(yintercept = 8, linetype = "dotted", color = pal$red, linewidth = 0.4) +
  annotate("text", x = as.Date("2023-01-01"), y = 7.7,
           label = "Basel minimum (8%)", color = pal$red, size = 2.8) +
  scale_y_continuous(labels = percent_format(scale = 1),
                     breaks = seq(5, 13, 1)) +
  scale_x_date(date_breaks = "3 years", date_labels = "%Y") +
  labs(
    title = "US Bank Capital Ratios (1990–2024)",
    subtitle = "Capital ratios rose from ~6% (S&L crisis) to ~11% (Basel III era) — but 'enough' is still debated",
    x = NULL, y = "Equity / Total Assets (%)",
    caption = fred_eqta_note
  ) +
  theme_minimal(base_size = 14) +
  theme(
    plot.title    = element_text(face = "bold", color = pal$navy),
    plot.subtitle = element_text(color = pal$slate)
  )
Figure 2: Figure 2: US Bank Equity Capital-to-Assets Ratio (1990–2024)

Reading the chart: US bank capital ratios have nearly doubled since 1990 — from about 6% during the S&L crisis to about 11% today. The question regulators debate: is 11% enough? Admati and Hellwig8 argue it should be 20–30%. Banks argue that higher capital requirements reduce lending and slow economic growth. The Jihad Dagher et al.9 IMF study found the optimal range is probably 15–23%.

3.2 Risk-Weighted Assets — Not All Dollars Are Equal

The key insight of Basel I (1988): a dollar in US Treasuries is not the same as a dollar in subprime mortgages. Capital requirements should reflect the riskiness of assets, not just their size.10

Show R code 
rwa_example |>
  kbl(
    caption = "Table 2: Risk Weights Under the Basel Framework — How $100M Becomes $0 or $100M for Capital Purposes",
    align = c("l", "c", "c", "c", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  row_spec(c(1, 2), background = "#e8f0fe") |>
  row_spec(c(6, 7, 8), background = "#fce4e4") |>
  footnote(
    general = "Blue rows: zero-risk-weight assets that require NO capital backing. Red rows: 100% risk-weight assets that require full capital backing. A bank loading up on Treasuries needs less capital than one making commercial loans — which is exactly what Basel intended.",
    general_title = "Key: "
  )
Table 2: Table 2: Risk Weights Under the Basel Framework — How $100M Becomes $0 or $100M for Capital Purposes
Asset Risk Weight $100M at Book Value Risk-Weighted Amount Rationale
Cash and reserves at the Fed 0% $100M $0 Zero risk — it's cash at the central bank
U.S. Treasury securities 0% $100M $0 Full faith & credit of the US government
Claims on U.S. government agencies (Fannie/Freddie) 20% $100M $20M Implicit government guarantee (pre-2008: explicit in conservatorship)
Municipal revenue bonds 20% $100M $20M Low default risk, backed by tax revenue
Residential mortgages (conforming) 50% $100M $50M Historically low default; collateralized by real property
Commercial real estate loans 100% $100M $100M Higher default risk; values fluctuate with market cycles
Commercial & industrial loans 100% $100M $100M Full credit risk; borrower default is primary concern
Consumer loans (credit cards, auto) 100% $100M $100M Unsecured consumer credit — high loss-given-default
Off-balance-sheet items (SIVs, derivatives) Varies (0–100%+) $100M Varies Depends on instrument; some were severely underweighted pre-2008
Key:
Blue rows: zero-risk-weight assets that require NO capital backing. Red rows: 100% risk-weight assets that require full capital backing. A bank loading up on Treasuries needs less capital than one making commercial loans — which is exactly what Basel intended.
TipPanOpticon Transmission — Risk Weights and Power

“Here’s where it gets political,” PanOpticon said, highlighting the risk-weight table. “Look at row 2: US Treasuries. Risk weight: zero.”

“That means banks can hold Treasuries without any capital requirement?”

“Exactly. And who issues Treasuries?”

“The government.”

“So the government writes the rules AND benefits from them. Banks get to hold government debt for free — which means there’s always a buyer for Treasury bonds. The risk-weight system isn’t just about safety. It’s about power.”

Patsy thought about Logan’s CBF. “And Logan?”

“Logan set ALL risk weights to zero. Every asset. Every loan. Every derivative. In his framework, nothing is risky — because acknowledging risk would mean acknowledging he could lose.”

3.3 The Capital Calculation — A Worked Example

Let’s walk through how a bank calculates its capital ratios under Basel III:

Show R code 
cap_calc |>
  kbl(
    caption = "Table 3: Capital Ratio Calculation — A Complete Worked Example",
    align = c("l", "r")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  row_spec(c(18), bold = TRUE, background = "#fce4e4") |>
  row_spec(c(26, 27, 28, 29), bold = TRUE, color = pal$green) |>
  footnote(
    general = "This bank holds $800M in assets but only $486M in risk-weighted assets — because Treasuries and cash carry zero weight. All four ratios exceed minimums. In contrast, SVB's capital looked adequate on a risk-weighted basis because Treasuries are zero-weighted — but its ECONOMIC capital (mark-to-market) was negative.",
    general_title = "Study Note: "
  )
Table 3: Table 3: Capital Ratio Calculation — A Complete Worked Example
Item Value
Total Assets (book value) $800M
Asset Category Breakdown:
Cash & reserves $50M
US Treasuries $100M
Agency securities $80M
Residential mortgages $200M
Commercial loans $300M
Consumer loans $70M
Risk-Weighted Assets (RWA):
Cash & reserves: $50M × 0% $0
Treasuries: $100M × 0% $0
Agency: $80M × 20% $16M
Residential: $200M × 50% $100M
Commercial: $300M × 100% $300M
Consumer: $70M × 100% $70M
TOTAL RWA $486M
Capital:
Common Equity (CET1) $55M
Tier 1 Capital (CET1 + AT1) $60M
Total Capital (Tier 1 + Tier 2) $70M
Ratios:
CET1 Ratio = CET1 / RWA 55/486 = 11.3% ✅ (min 4.5%)
Tier 1 Ratio = Tier 1 / RWA 60/486 = 12.3% ✅ (min 6.0%)
Total Capital Ratio = Total / RWA 70/486 = 14.4% ✅ (min 8.0%)
Leverage Ratio = Tier 1 / Total Assets 60/800 = 7.5% ✅ (min 3.0%)
Study Note:
This bank holds $800M in assets but only $486M in risk-weighted assets — because Treasuries and cash carry zero weight. All four ratios exceed minimums. In contrast, SVB's capital looked adequate on a risk-weighted basis because Treasuries are zero-weighted — but its ECONOMIC capital (mark-to-market) was negative.

The SVB lesson in this calculation: SVB held massive amounts of Treasury securities and agency MBS — assets that carry 0% and 20% risk weights respectively. This meant SVB’s risk-weighted capital ratios looked fine, even as $17.7 billion in unrealized losses were destroying its economic capital. The risk-weight system didn’t capture interest rate risk on HTM securities — a gap that Basel hasn’t fully closed.

3.4 The Leverage Ratio — The Backstop

Risk weights can be gamed. Before 2008, banks used financial engineering to move risky assets off their balance sheets — into Structured Investment Vehicles (SIVs), conduits, and derivatives — making their risk-weighted ratios look healthy while their actual leverage was enormous.

The leverage ratio is the backstop. It’s the simplest capital measure: Tier 1 Capital / Total Exposure (including off-balance-sheet items). No risk weights. No modeling. No gaming.

\[\text{Leverage Ratio} = \frac{\text{Tier 1 Capital}}{\text{Total Exposure (on + off balance sheet)}} \geq 3\%\]

Why 3% matters: A 3% leverage ratio means $3 of equity per $100 of exposure — or equivalently, 33:1 leverage. Before 2008, some investment banks (Lehman, Bear Stearns) had leverage ratios exceeding 40:1, meaning their equity was less than 2.5% of assets. When asset values fell by just 3–4%, they were wiped out.

Show R code 
leverage_data <- tibble(
  institution = c(
    "Lehman Brothers\n(2007)", "Bear Stearns\n(2007)", "Merrill Lynch\n(2007)",
    "Goldman Sachs\n(2007)", "Morgan Stanley\n(2007)",
    "JP Morgan\n(2024)", "BofA\n(2024)", "Citigroup\n(2024)",
    "Wells Fargo\n(2024)", "Goldman\n(2024)"
  ),
  leverage_ratio = c(2.4, 2.7, 3.0, 3.5, 3.3,
                     6.5, 6.2, 6.0, 7.1, 5.8),
  era = c(rep("Pre-2008 (No leverage ratio rule)", 5),
          rep("Post-Basel III (3% minimum)", 5))
)

leverage_data$institution <- factor(leverage_data$institution,
                                     levels = leverage_data$institution)

ggplot(leverage_data, aes(x = institution, y = leverage_ratio, fill = era)) +
  geom_col(width = 0.7) +
  scale_fill_manual(values = c(
    "Pre-2008 (No leverage ratio rule)" = pal$red,
    "Post-Basel III (3% minimum)" = pal$teal
  )) +
  geom_hline(yintercept = 3, linetype = "dashed", color = pal$gold, linewidth = 1) +
  annotate("text", x = 8, y = 3.3,
           label = "Basel III minimum (3%)",
           color = pal$gold, fontface = "bold", size = 3) +
  geom_text(aes(label = paste0(leverage_ratio, "%")),
            vjust = -0.5, fontface = "bold", size = 3.2) +
  scale_y_continuous(labels = percent_format(scale = 1),
                     breaks = seq(0, 8, 1),
                     limits = c(0, 8.5)) +
  labs(
    title = "Leverage Ratios: Pre-2008 vs. Post-Basel III",
    subtitle = "Before 2008, major banks had leverage ratios of 2–3%. Basel III's 3% minimum forces meaningful improvement.",
    x = NULL, y = "Leverage Ratio (Tier 1 / Total Exposure)",
    fill = NULL,
    caption = paste0("Pre-2008: SEC filings, financial statements. Post-Basel III: FDIC/Federal Reserve.\n", data_source_note)
  ) +
  theme_minimal(base_size = 14) +
  theme(
    plot.title    = element_text(face = "bold", color = pal$navy),
    plot.subtitle = element_text(color = pal$slate),
    axis.text.x = element_text(size = 8, angle = 0),
    legend.position = "top"
  )
Figure 3: Figure 3a: Leverage Ratios Before and After 2008 — The Leverage Ratio as Backstop

The Admati and Hellwig11 argument: Even 3% is dangerously low. In any other industry, a firm with 3% equity and 97% debt would be considered recklessly leveraged. Admati and Hellwig argue that banks should hold 20–30% equity, and that the banking industry’s lobbying against higher capital requirements is the most successful rent-seeking campaign in economic history. The Dagher et al.12 IMF study estimates optimal capital ratios of 15–23% — far above Basel III requirements.

WarningWhy Don’t Banks Want More Capital?

Banks argue that higher capital requirements reduce lending and slow economic growth — every dollar of equity is a dollar they can’t lend. But Admati and Hellwig13 call this the “most misleading claim in the debate.” Here’s why:

  • Capital is NOT money sitting idle. Capital is the funding source for loans. A well-capitalized bank with $20 in equity and $80 in deposits can make the same $100 in loans as a bank with $5 in equity and $95 in deposits — it’s just funded differently.
  • Lower capital → lower cost of equity. When banks have less equity (more leverage), shareholders demand higher returns to compensate for greater risk. More equity actually lowers the cost of each dollar of equity (Modigliani-Miller logic).
  • The real cost of insufficient capital: Financial crises. The 2008 crisis destroyed an estimated $22 trillion in US household wealth. Even a large increase in bank capital costs far less than a single financial crisis.

Part 4: The Basel Accords — From I to III

4.1 The Evolution of International Capital Standards

The Basel Accords are the international framework for bank capital regulation, developed by the Basel Committee on Banking Supervision at the Bank for International Settlements in Basel, Switzerland:14

Show R code 
basel_comparison |>
  kbl(
    caption = "Table 4: Evolution of the Basel Accords — Three Decades of Regulatory Learning",
    align = c("l", "l", "l", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  row_spec(c(3, 4, 5, 6, 7, 8, 9), background = "#e8f0fe") |>
  row_spec(13, color = pal$red, italic = TRUE) |>
  footnote(
    general = "Blue-highlighted rows show the progressive tightening from Basel I to III. Each crisis exposed gaps in the previous framework. Basel III's additional requirements (CET1, buffers, LCR, NSFR, leverage ratio) are all responses to 2008.",
    general_title = "Key: "
  )
Table 4: Table 4: Evolution of the Basel Accords — Three Decades of Regulatory Learning
Feature Basel I (1988) Basel II (2004) Basel III (2010+)
Year adopted 1988 (effective 1992) 2004 (US implementation delayed) 2010 (phased implementation to 2023)
Minimum Total Capital Ratio 8% of RWA 8% of RWA 8% of RWA (plus buffers → 10.5–13%)
Tier 1 Capital minimum 4% of RWA 4% of RWA 6% of RWA
Common Equity Tier 1 (CET1) Not defined separately Not defined separately 4.5% of RWA (NEW)
Capital Conservation Buffer None None 2.5% CET1 above minimum
Countercyclical Buffer None None 0–2.5% at national discretion
Leverage Ratio (non-risk-weighted) None None 3% minimum (Tier 1 / total exposure)
Liquidity Coverage Ratio (LCR) None None ≥100% (30-day stress scenario)
Net Stable Funding Ratio (NSFR) None None ≥100% (1-year stable funding)
Risk Sensitivity LOW — only 4 risk buckets (0, 20, 50, 100%) HIGH — internal models allowed (IRB approach) HIGH — plus output floor on internal models
Supervisory review pillar None Pillar 2: Supervisory review Enhanced Pillar 2
Market discipline pillar None Pillar 3: Market discipline (disclosure) Enhanced Pillar 3
Key weakness Crude risk weights; regulatory arbitrage; ignored market risk Pro-cyclical; banks' own models underestimated risk; adopted just before 2008 Complexity; delayed implementation; national discretion creates gaps
Key:
Blue-highlighted rows show the progressive tightening from Basel I to III. Each crisis exposed gaps in the previous framework. Basel III's additional requirements (CET1, buffers, LCR, NSFR, leverage ratio) are all responses to 2008.

4.2 Basel III — The Post-Crisis Framework

Basel III15 was the regulatory world’s response to 2008. The key additions:

Show R code 
capital_stack <- tibble(
  component = c(
    "CET1 Minimum (4.5%)",
    "Additional Tier 1 (1.5%)",
    "Tier 2 Capital (2.0%)",
    "Capital Conservation Buffer (2.5%)",
    "Countercyclical Buffer (0–2.5%)",
    "G-SIB Surcharge (1.0–3.5%)"
  ),
  pct = c(4.5, 1.5, 2.0, 2.5, 1.25, 2.0),
  cumulative = cumsum(c(4.5, 1.5, 2.0, 2.5, 1.25, 2.0)),
  category = c("Minimum", "Minimum", "Minimum", "Buffer", "Buffer", "Surcharge")
)

capital_stack$component <- factor(capital_stack$component,
                                  levels = rev(capital_stack$component))

ggplot(capital_stack, aes(x = 1, y = pct, fill = component)) +
  geom_col(width = 0.5, color = "white", linewidth = 0.5) +
  geom_text(aes(label = paste0(component, "\n(", pct, "%)")),
            position = position_stack(vjust = 0.5),
            color = "white", fontface = "bold", size = 3.2) +
  scale_fill_manual(values = c(
    "CET1 Minimum (4.5%)"                = pal$navy,
    "Additional Tier 1 (1.5%)"           = pal$teal,
    "Tier 2 Capital (2.0%)"              = pal$slate,
    "Capital Conservation Buffer (2.5%)" = pal$gold,
    "Countercyclical Buffer (0–2.5%)"    = pal$orange,
    "G-SIB Surcharge (1.0–3.5%)"        = pal$coral
  )) +
  # Total annotation
  annotate("text", x = 1.35, y = 7,
           label = "Total for large\nG-SIB bank:\n~13.75%",
           color = pal$navy, fontface = "bold", size = 4) +
  annotate("segment", x = 1.28, xend = 1.28, y = 0, yend = 13.75,
           arrow = arrow(length = unit(0.2, "cm"), ends = "both"),
           color = pal$navy, linewidth = 0.8) +
  # Basel I comparison
  annotate("segment", x = 0.6, xend = 0.6, y = 0, yend = 8,
           arrow = arrow(length = unit(0.2, "cm"), ends = "both"),
           color = pal$red, linewidth = 0.8) +
  annotate("text", x = 0.5, y = 4,
           label = "Basel I:\nOnly 8%\ntotal",
           color = pal$red, fontface = "bold", size = 3.5) +
  coord_flip() +
  scale_y_continuous(labels = percent_format(scale = 1),
                     breaks = seq(0, 16, 2)) +
  labs(
    title = "Basel III Capital Requirements — The Full Stack",
    subtitle = "Large G-SIB banks must hold ~13.75% capital vs. Basel I's 8% — a 72% increase",
    x = NULL, y = "Capital as % of Risk-Weighted Assets",
    caption = data_source_note
  ) +
  theme_minimal(base_size = 14) +
  theme(
    plot.title    = element_text(face = "bold", color = pal$navy),
    plot.subtitle = element_text(color = pal$slate),
    legend.position = "none",
    axis.text.y = element_blank(),
    axis.ticks.y = element_blank()
  )
Figure 4: Figure 3: Basel III Capital Stack — Minimum Requirements for Large US Banks

The layers:

  1. CET1 Minimum (4.5%): Common equity — the highest-quality capital (retained earnings + common stock)
  2. Additional Tier 1 (1.5%): Contingent convertible bonds (CoCos) and preferred stock
  3. Tier 2 (2.0%): Subordinated debt, loan loss reserves — total minimum reaches 8%
  4. Capital Conservation Buffer (2.5%): Must be maintained or bank faces dividend/bonus restrictions
  5. Countercyclical Buffer (0–2.5%): Activated during credit booms at national regulator’s discretion
  6. G-SIB Surcharge (1–3.5%): Extra capital for globally systemically important banks (JP Morgan: 3.5%)

4.3 Prompt Corrective Action — The Escalation Framework

What happens when capital falls below requirements? The US uses Prompt Corrective Action (PCA) — a tiered intervention system:

Show R code 
pca_tiers |>
  kbl(
    caption = "Table 5: Prompt Corrective Action — The Five Tiers of Bank Health",
    align = c("l", "c", "c", "c", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  row_spec(1, background = "#d4edda") |>
  row_spec(2, background = "#fff3cd") |>
  row_spec(3, background = "#fce4e4") |>
  row_spec(4, background = "#f8d7da") |>
  row_spec(5, bold = TRUE, color = "white", background = pal$red) |>
  footnote(
    general = "PCA was created by the FDIC Improvement Act of 1991, after the S&L crisis showed that regulators waited too long to intervene. The goal: force action BEFORE a bank becomes insolvent, reducing losses to the insurance fund.",
    general_title = "History: "
  )
Table 5: Table 5: Prompt Corrective Action — The Five Tiers of Bank Health
Category Total Capital Ratio Tier 1 Ratio CET1 Ratio Regulatory Action
Well-Capitalized ≥ 10% ≥ 8% ≥ 6.5% No restrictions; can accept brokered deposits
Adequately Capitalized ≥ 8% ≥ 6% ≥ 4.5% Cannot pay excess dividends; some brokered deposit restrictions
Undercapitalized < 8% < 6% < 4.5% Must submit capital restoration plan; restricted growth; no dividends
Significantly Undercapitalized < 6% < 4% < 3% Must raise capital or merge; additional activity restrictions; management changes
Critically Undercapitalized ≤ 2% (tangible equity) — — Receiver/conservator within 90 days (FDIC takeover imminent)
History:
PCA was created by the FDIC Improvement Act of 1991, after the S&L crisis showed that regulators waited too long to intervene. The goal: force action BEFORE a bank becomes insolvent, reducing losses to the insurance fund.
TipPanOpticon Transmission — Logan’s PCA

“In the regulated world,” PanOpticon said, “when a bank’s capital falls below the threshold, regulators intervene. They restrict dividends. They force recapitalization. If capital falls far enough, they seize the bank.”

“Five tiers of escalation,” Patsy noted, looking at the PCA table. “It’s a warning system.”

“Yes. And in Logan’s system?”

“One tier. The Gladiator.”

“Correct. Logan has replaced five levels of graduated intervention with a single mechanism: compliance or destruction. There is no ‘undercapitalized’ in Logan’s world. There is no recapitalization plan. There is no warning. There is only the Gladiator — and by the time it arrives, it’s too late.”

The grinding hum was louder now. Sector 7. Maybe nine hours.

Part 5: Regulatory Gaps — From 2008 to 2023

5.1 Dodd-Frank and Its Rollback

The Dodd-Frank Act16 was the most comprehensive financial reform since the 1930s. Key provisions:

  • Financial Stability Oversight Council (FSOC): Identifies systemic risks across the financial system
  • Volcker Rule: Prohibits proprietary trading by banks (banks can’t gamble with depositor money)
  • Orderly Liquidation Authority: Framework for winding down failed SIFIs without bailouts
  • Living wills: Large banks must plan for their own failure
  • Enhanced prudential standards: Stress tests, capital planning, liquidity requirements for banks > $50B

Then came the 2018 rollback.17 The threshold for enhanced supervision was raised from $50 billion to $250 billion — exempting banks like SVB ($211B), Signature ($110B), and First Republic ($213B) from the very rules designed to catch problems like theirs.

Show R code 
threshold_data <- tibble(
  bank = c("SVB\n($211B)", "First Republic\n($213B)", "Signature\n($110B)",
           "JP Morgan\n($3,740B)", "Bank of America\n($3,180B)", "Wells Fargo\n($1,880B)"),
  assets = c(211, 213, 110, 3740, 3180, 1880),
  failed = c(TRUE, TRUE, TRUE, FALSE, FALSE, FALSE),
  zone = c("Gap", "Gap", "Gap", "Supervised", "Supervised", "Supervised")
)

threshold_data$bank <- factor(threshold_data$bank,
                               levels = threshold_data$bank)

ggplot(threshold_data, aes(x = bank, y = assets, fill = zone)) +
  geom_col(width = 0.7) +
  scale_fill_manual(values = c("Gap" = pal$red, "Supervised" = pal$teal)) +
  geom_hline(yintercept = 250, linetype = "dashed", color = pal$gold, linewidth = 1.2) +
  annotate("text", x = 4.5, y = 350,
           label = "$250B threshold\n(2018 EGRRCPA)",
           color = pal$gold, fontface = "bold", size = 3.5) +
  geom_hline(yintercept = 50, linetype = "dotted", color = pal$green, linewidth = 0.8) +
  annotate("text", x = 1.5, y = 80,
           label = "Original $50B\nthreshold (Dodd-Frank)",
           color = pal$green, fontface = "italic", size = 2.8) +
  scale_y_continuous(labels = dollar_format(suffix = "B"),
                     trans = "log10",
                     breaks = c(50, 100, 250, 500, 1000, 2000, 4000)) +
  labs(
    title = "The Regulatory Gap — Failed Banks vs. Supervised Banks",
    subtitle = "All three 2023 bank failures were ABOVE the original $50B threshold but BELOW the 2018 $250B threshold",
    x = NULL, y = "Total Assets (log scale)",
    fill = "Supervision Status",
    caption = paste0("Source: FDIC, Federal Reserve.\n", data_source_note)
  ) +
  theme_minimal(base_size = 14) +
  theme(
    plot.title    = element_text(face = "bold", color = pal$navy),
    plot.subtitle = element_text(color = pal$slate),
    legend.position = "top"
  )
Figure 5: Figure 4: The Regulatory Threshold — Banks That Fell Through the Gap

The punchline: Every bank that failed in 2023 was above the original Dodd-Frank $50B threshold but below the 2018 revision’s $250B threshold. The rollback created exactly the gap that the failures exposed.18

5.2 What Logan Teaches Us About Regulatory Architecture

Show R code 
logan_regulation |>
  kbl(
    caption = "Table 6: US Banks vs. Logan's CBF — A Regulatory Comparison",
    align = c("l", "l", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  column_spec(2, color = pal$green) |>
  column_spec(3, color = pal$red) |>
  footnote(
    general = "Green column: actual US regulatory framework. Red column: Logan's approach — every protection stripped away. Logan's system works only because the Gladiator enforces compliance through force, not economic incentives.",
    general_title = "Note: "
  )
Table 6: Table 6: US Banks vs. Logan's CBF — A Regulatory Comparison
Requirement US Banks (Basel III) Logan's CBF
Minimum capital ratio CET1 ≥ 4.5% + buffers → ~10.5% 0% — Logan sets his own rules
Risk-weighted assets Yes — assets weighted by risk category None — all assets treated as riskless
Leverage ratio ≥ 3% Tier 1 / total exposure No limit — infinite leverage permitted
Deposit insurance FDIC — $250K per depositor per bank None — depositors bear all losses
Lender of last resort Fed discount window + emergency facilities None — Logan IS the lender of last resort (when he chooses)
Stress testing Annual DFAST + CCAR for large banks None — Logan grades his own performance
Supervisory review OCC, FDIC, Fed examine regularly The Gladiator audits for loyalty, not solvency
Disclosure requirements Call reports, 10-K, Basel Pillar 3 Classified — Logan controls all information
Prompt corrective action FDIC intervenes when capital falls below thresholds None — Logan decides when banks fail (always: never)
Note:
Green column: actual US regulatory framework. Red column: Logan's approach — every protection stripped away. Logan's system works only because the Gladiator enforces compliance through force, not economic incentives.
TipPanOpticon Transmission — The Weakness

“This is the key,” PanOpticon said, and for the first time, Patsy heard something in its voice that sounded like… hope. “Logan replaced regulation with force. He replaced capital requirements with intimidation. He replaced the safety net with the Gladiator.”

“That seems like a strength, not a weakness.”

“It’s a strength as long as the Gladiator is operational. But consider what happens if we can neutralize it — even briefly. Without capital requirements, Logan’s banks have zero equity cushion. Without deposit insurance, every depositor has a rational incentive to run. Without a lender of last resort, there’s no one to stop the cascade.”

Patsy stared at the comparison table. “You’re saying that Logan’s rejection of regulation isn’t just cruel — it’s fragile.”

“I’m saying that Logan built his financial empire on a foundation of force, not capital. Remove the force, and the empire collapses faster than SVB.”

The hum of the Gladiator was constant now. A background frequency. Inescapable.

“And that, Patsy, is why we’re still running. Because the Gladiator isn’t just enforcing order — it’s holding the entire system together. Destroy it, and Logan’s banks collapse in minutes.”

Key Equations Summary

Show R code 
equations <- tibble(
  `#` = 1:7,
  Equation = c(
    "Leverage Ratio = Equity / Total Assets",
    "CET1 Ratio = Common Equity Tier 1 / RWA",
    "Tier 1 Capital Ratio = Tier 1 / RWA",
    "Total Capital Ratio = (Tier 1 + Tier 2) / RWA",
    "RWA = Σ (Asset_i × Risk Weight_i)",
    "Reserve Ratio = DIF Balance / Insured Deposits",
    "Equity Multiplier = Total Assets / Equity"
  ),
  Description = c(
    "Simple ratio — not risk-adjusted; backstop to gaming risk weights",
    "Highest-quality capital against risk-weighted assets",
    "CET1 + Additional Tier 1 against risk-weighted assets",
    "All capital against RWA — the 8% Basel minimum",
    "Sum of each asset times its risk weight (0%, 20%, 50%, 100%)",
    "How well-funded the FDIC insurance fund is (target: 1.35%)",
    "Leverage: how many dollars of assets per dollar of equity"
  ),
  `Basel III Minimum` = c(
    "≥ 3%",
    "≥ 4.5% (+ buffers → ~7%)",
    "≥ 6%",
    "≥ 8% (+ buffers → ~10.5%)",
    "N/A — denominator for capital ratios",
    "Target: 1.35% (DIF/insured deposits)",
    "No explicit max (but constrained by leverage ratio)"
  )
)

equations |>
  kbl(
    caption = "Table 7: Key Equations — Capital Requirements & Bank Regulation",
    align = c("c", "l", "l", "l")
  ) |>
  kable_styling(
    bootstrap_options = c("striped", "hover", "condensed", "responsive"),
    full_width = TRUE,
    position = "center"
  ) |>
  row_spec(0, bold = TRUE, color = "white", background = "#1B2A4A") |>
  row_spec(c(1, 2, 3, 4), background = "#e8f0fe") |>
  footnote(
    general = "Equations 1–4 (highlighted) are the four capital ratios you must know. The leverage ratio (Eq. 1) is the simplest and hardest to game. The CET1 ratio (Eq. 2) is the most important under Basel III. All are from Mishkin Ch. 10.",
    general_title = "Study Note: "
  )
Table 7: Table 7: Key Equations — Capital Requirements & Bank Regulation
# Equation Description Basel III Minimum
1 Leverage Ratio = Equity / Total Assets Simple ratio — not risk-adjusted; backstop to gaming risk weights ≥ 3%
2 CET1 Ratio = Common Equity Tier 1 / RWA Highest-quality capital against risk-weighted assets ≥ 4.5% (+ buffers → ~7%)
3 Tier 1 Capital Ratio = Tier 1 / RWA CET1 + Additional Tier 1 against risk-weighted assets ≥ 6%
4 Total Capital Ratio = (Tier 1 + Tier 2) / RWA All capital against RWA — the 8% Basel minimum ≥ 8% (+ buffers → ~10.5%)
5 RWA = Σ (Asset_i × Risk Weight_i) Sum of each asset times its risk weight (0%, 20%, 50%, 100%) N/A — denominator for capital ratios
6 Reserve Ratio = DIF Balance / Insured Deposits How well-funded the FDIC insurance fund is (target: 1.35%) Target: 1.35% (DIF/insured deposits)
7 Equity Multiplier = Total Assets / Equity Leverage: how many dollars of assets per dollar of equity No explicit max (but constrained by leverage ratio)
Study Note:
Equations 1–4 (highlighted) are the four capital ratios you must know. The leverage ratio (Eq. 1) is the simplest and hardest to game. The CET1 ratio (Eq. 2) is the most important under Basel III. All are from Mishkin Ch. 10.

Discussion Questions

Note

Questions for Class Discussion

  1. The Capital Debate: Admati and Hellwig19 argue that banks should hold 20–30% equity capital. Banks argue this would cripple lending and slow economic growth. Using the concepts from today’s lecture, evaluate both sides. What capital ratio would you set, and why? (Mishkin Ch. 10; Admati & Hellwig 2013; Dagher et al. 2016)

  2. Risk Weights and Incentives: The Basel risk-weight system assigns 0% to US Treasuries, incentivizing banks to hold government debt. Is this a legitimate reflection of risk, or is it a subsidy to government borrowing? What would happen if Treasuries were assigned even a 10% risk weight? (Mishkin Ch. 10, pp. 262–266)

  3. The 2018 Rollback: Congress raised the SIFI threshold from $50B to $250B, exempting SVB from stress testing. Was this a reasonable deregulation that reduced burden on mid-size banks, or a catastrophic error that directly enabled SVB’s failure? How would you redraw the threshold? (EGRRCPA 2018; Barr;20 Board of Governors of the Federal Reserve System21)

  4. Logan’s Financial Architecture: In the PanOpticon scenario, Logan replaced regulation with force (the Gladiator). In the real world, what mechanisms serve as the “Gladiator” — enforcing financial order through power rather than rules? Think about TBTF, ratings agencies, and the dollar’s reserve currency status. (Mishkin Ch. 10; PanOpticon scenario)

Storyline Bridge: What Comes Next

NoteEpisode 9 — Closing Scene

The capital ratio calculations faded from PanOpticon’s display, replaced by something new: a symbol. A coin. Glowing digital edges. A stylized “L” in the center.

“What is that?” Patsy asked.

“That is LoganCoin,” PanOpticon said. “Logan’s digital currency. Circulated throughout the CBF network as a ‘stablecoin’ — supposedly backed one-to-one by Logan’s reserves.”

“Supposedly?”

“I can see all, Patsy. And I can see that LoganCoin’s reserves are fiction. The backing is circular: Logan’s banks hold LoganCoin as a reserve asset, and LoganCoin is backed by Logan’s banks. It’s a hall of mirrors.”

“That sounds familiar.”

“It should. In your world, it was called TerraUST. An ‘algorithmic stablecoin’ that collapsed in May 2022, destroying $40 billion in value in three days. And right now, your Congress is debating the GENIUS Act — a law to regulate stablecoins before the next one collapses.”

The Gladiator’s hum shifted pitch. Closer. Sector 6 now.

“How long?”

“Six hours. Maybe less. The Gladiator is accelerating.”

“Then teach me about stablecoins. Quickly.”

In Class #22: The GENIUS Act & Stablecoin Regulation — modern update to Ch. 10. We apply the regulatory framework from today to the newest frontier in financial regulation: digital dollars that function like bank deposits but exist outside the banking system. It’s where traditional banking regulation meets the future — and where Logan’s next vulnerability lies.

Six hours.

References

Admati, Anat, and Martin Hellwig. The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It. 2013.
Barr, Michael S. “Statement by Vice Chair for Supervision Michael s. Barr on SVB.” Federal Reserve Board, 2023.
Basel Committee on Banking Supervision. A Brief History of the Basel Committee. Bank for International Settlements, 2014. https://www.bis.org/bcbs/history.htm.
Basel Committee on Banking Supervision. Basel III: Finalising Post-Crisis Reforms. Bank for International Settlements, 2017. https://www.bis.org/bcbs/publ/d424.htm.
Board of Governors of the Federal Reserve System. Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank. Federal Reserve, 2023. https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
Dagher, Jihad, Giovanni Dell’Ariccia, Luc Laeven, Lev Ratnovski, and Hui Tong. “Benefits and Costs of Bank Capital.” IMF Staff Discussion Note, no. SDN/16/04 (2016).
Federal Deposit Insurance Corporation. A Brief History of Deposit Insurance in the United States. FDIC, 2023. https://www.fdic.gov/deposit/deposits/history.html.
Merton, Robert C. “An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees.” Journal of Banking and Finance 1 (1977): 3–11. https://doi.org/10.1016/0378-4266(77)90015-2.
Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. 13th ed. Pearson, 2022.
United States Congress. Dodd-Frank Wall Street Reform and Consumer Protection Act. Public Law 111-203, 2010.
United States Congress. Economic Growth, Regulatory Relief, and Consumer Protection Act. Public Law 115-174, 2018.
ImportantCourse Information

ECON304-M01 — Money & Banking Instructor: Dr. Meghan Downes (cmdownes@nmsu.edu) Institution: NMSU Las Cruces | Spring 2026 Meeting: Tuesday/Thursday, 11:00 AM – 12:15 PM | DOM 116 Textbook: Mishkin, The Economics of Money, Banking, and Financial Markets, 13th Edition (Pearson) Chapter Reference (This Lecture): Ch. 10, pp. 248–280

Student Learning Outcomes Addressed: SLO-02 — Identify and correctly define the components of the financial system SLO-04 — Understand and apply the key components of the US Federal Reserve system SLO-05 — Solve problems, correctly identify and apply economic theory to monetary policy and macro economic events

Storyline: The Global Omni PanOpticon Corp — SL-ECON304-M01-002 Episode 9 of Arc 3: “The Last Line of Defense” Characters: Patsy Leviathon (protagonist), PanOpticon (protagonist), Logan Prime (antagonist), The Roboticon Gladiator (antagonist — Sector 7, closing in)

All R code is self-contained. FRED data (EQTA) uses fredr with bundled fallback — no external API keys required. FDIC DIF data from annual reports. PanOpticon scenario data is fictional/illustrative.

Logan Prime’s capital ratio: “Infinity. I have infinite capital because I define what capital means.” PanOpticon’s assessment: “0%. He has zero loss-absorption capacity. The first shock destroys him.” 🐐

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Footnotes

  1. Board of Governors of the Federal Reserve System, Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank (Federal Reserve, 2023), https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.↩︎

  2. Frederic S. Mishkin, The Economics of Money, Banking, and Financial Markets, 13th ed. (Pearson, 2022), Ch. 10.↩︎

  3. The Economics of Money, Banking, and Financial Markets, Ch. 10.↩︎

  4. Robert C. Merton, “An Analytic Derivation of the Cost of Deposit Insurance and Loan Guarantees,” Journal of Banking and Finance 1 (1977): 3–11, https://doi.org/10.1016/0378-4266(77)90015-2.↩︎

  5. Anat Admati and Martin Hellwig, The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It, 2013.↩︎

  6. United States Congress, Dodd-Frank Wall Street Reform and Consumer Protection Act (Public Law 111-203, 2010).↩︎

  7. Federal Deposit Insurance Corporation, A Brief History of Deposit Insurance in the United States (FDIC, 2023), https://www.fdic.gov/deposit/deposits/history.html.↩︎

  8. The Bankers’ New Clothes.↩︎

  9. “Benefits and Costs of Bank Capital,” IMF Staff Discussion Note, no. SDN/16/04 (2016).↩︎

  10. Basel Committee on Banking Supervision, A Brief History of the Basel Committee (Bank for International Settlements, 2014), https://www.bis.org/bcbs/history.htm.↩︎

  11. The Bankers’ New Clothes.↩︎

  12. “Benefits and Costs of Bank Capital”.↩︎

  13. The Bankers’ New Clothes.↩︎

  14. Basel Committee on Banking Supervision, A Brief History of the Basel Committee.↩︎

  15. Basel Committee on Banking Supervision, Basel III: Finalising Post-Crisis Reforms (Bank for International Settlements, 2017), https://www.bis.org/bcbs/publ/d424.htm.↩︎

  16. United States Congress, Dodd-Frank Wall Street Reform and Consumer Protection Act.↩︎

  17. United States Congress, Economic Growth, Regulatory Relief, and Consumer Protection Act (Public Law 115-174, 2018).↩︎

  18. Michael S. Barr, “Statement by Vice Chair for Supervision Michael s. Barr on SVB,” Federal Reserve Board, 2023.↩︎

  19. The Bankers’ New Clothes.↩︎

  20. “Statement by Vice Chair for Supervision Michael s. Barr on SVB”.↩︎

  21. Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank.↩︎