A Law and Finance Approach
Chapter 5: Regulatory capital
Regulatory capital imposes a complex set of global standards on how banks manage their borrowing and equity issuance. To analyze these standards, this chapter develops the notion of a pro forma regulatory balance sheet derived from the bank’s financial statement of position but adjusted in accordance with prudential policies set by national regulators. The chapter also analyzes post-crisis reforms of regulatory capital, which attempt to increase the bank’s tangible net worth, to link minimum capital requirements to the bank’s business model, and, in general, to make determinations of capital adequacy more responsive to changes in the financial instability of an entity or markets as a whole.
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