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Bank Funding, Liquidity, and Capital Adequacy

A Law and Finance Approach

José Gabilondo

Focusing primarily on the banking system in the United States, this book offers an innovative framework that integrates a depository bank’s liquidity and its capital adequacy into a unified notion of funding that helps to explain how the 2007–2008 crisis unfolded, why central banks succeeded in resolving the crisis, and how the conceptual legacy of the crisis and its resolution led to lasting changes in bank funding regulation, including new objective requirements for bank liquidity. To provide a comparative context, the book also examines the funding models of non-bank intermediaries like dealer banks and insurers.
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Chapter 5: Regulatory capital

José Gabilondo


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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