Research Handbook on Securities Regulation in the United States
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Research Handbook on Securities Regulation in the United States

Edited by Jerry Markham and Rigers Gjyshi

This fascinating Handbook provides a clear explanation of the securities market regulation regime in the United States. A diverse set of contributors offer a comprehensive overview of the regulatory process, Dodd-Frank, the principal securities statutes, and the regulators and market participants involved. In addition to a general summary of the topic, this volume provides detailed explanations of the process for registering securities, exemptions from registration, secondary distributions, and the underwriting process. Scholars and students of financial law, banking and regulatory law will find this book a useful resource, as will attorneys, compliance professionals, risk-mitigation professionals and corporate leaders.
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Chapter 7: The rise of risk-based regulatory capital: liquidity and solvency standards for financial intermediaries

José Gabilondo


In a capitalist economy, a private firm seeking finance must negotiate with prospective investors in the open market, which establishes standards about the terms on which debt and equity investment will be forthcoming. In addition to these market-financing standards, the capital structure of some financial firms—particularly broker-dealers, federally insured depository institutions, and insurance companies—must satisfy other requirements imposed by federal or state regulators to promote liquidity and solvency. Regulators take a heightened interest in these firms because they serve a public function in providing credit and other financial services. To grasp what regulatory capital rules try to accomplish, the reader must make a conceptual shift to see these financial firms as highly leveraged borrowers, contending with the demands of their own creditors. From this perspective, the financial stability of these firms becomes a matter of public concern. The first section explains regulatory capital as a corporate finance issue about how capital structure can protect creditors—especially unsecured ones – from unexpected financial losses. The rest of the chapter examines the major features of the regulatory capital regimes that apply to financial intermediaries. The second section starts with depository institutions, i.e., banks. These standards have become the locus of policy debates about risk-based capital. The third section discusses the regulatory capital rules that apply to broker-dealers registered with the U.S. Securities and Exchange Commission (“SEC”).

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