Too often I see discussions of capital requirements reduced to simple comparisons of nominal factors like risk weights and capital ratios. This is particularly the case when looking at the impact of these factors on competition between large and small banks.
This post by Cetier1 uses New Zealand data to highlight the discrepancy between official requirements and market-driven behavior. It argues that while regulatory capital requirements set a floor, the market’s perception of risk and return ultimately dictates banks’ actual capital levels. Cetier illustrates that smaller banks often hold significantly more capital than required, while larger, “too big to fail” institutions may hold less, suggesting the market’s acceptance of their lower ratios.
Finding ways to help smaller banks compete with the big banks remains a worthy objective but this I think offers a useful reminder that risk weights are just one part of a complex topic.
Tony – From the Outside
From the outside 