BANK CAPITAL 

REFORMS

Initial Effects of Basel 

III on Capital, Credit, 

and International 

Competitiveness

Report to the Chairman, Subcommittee 

on Financial Institutions and Consumer 

Credit, Committee on Financial 

Services, House of Representatives

November 2014

GAO-15-67

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-15-67, a report to the 

Chairman, Subcommittee on Financial 

Institutions and Consumer Credit, Committee 

on Financial Services, House of 

Representatives

November 2014

BANK CAPITAL REFORMS

Initial Effects of Basel III on Capital, Credit, and 

International Competitiveness

Why GAO Did This Study

The 2007-2009 financial crisis revealed 

that many U.S. and international banks 

lacked capital of sufficient quality and 

quantity to absorb substantial losses. 

In 2010, the Basel Committee (the 

global standard-setter for prudential 

bank regulation) issued the Basel III 

framework—comprehensive reforms to 

strengthen global capital and liquidity 

standards with the goal of promoting a 

more resilient banking sector. In 2013, 

federal banking regulators adopted 

regulations to implement the Basel IIIbased capital standards in the United 

States, which generally apply to U.S. 

bank holding companies and banks

and are being phased in through 2019. 

Some market participants have raised 

questions about the potential negative 

impact of the regulations on U.S. 

banks, including on their lending and 

competitiveness. 

This report examines how (1) the U.S. 

Basel III regulations may affect U.S. 

banks, including smaller ones, and (2) 

implementation of Basel III by different 

countries and other jurisdictions may 

affect U.S. banking organizations’ 

international competitiveness. To 

address the objectives, GAO analyzed 

data from financial filings; conducted 

legal and economic analysis; reviewed 

empirical studies, federal regulations, 

and agency documents; and 

interviewed regulators, U.S. and 

foreign banks, and industry 

associations. 

GAO makes no recommendations in 

this report. GAO provided a draft of this 

report to the banking regulators for 

their review and comment and 

received technical comments, which 

were incorporated as appropriate. 

What GAO Found

Although the U.S. Basel III capital requirements may increase compliance costs,

they likely will have a modest impact on lending activity as most banks may not 

need to raise additional capital to meet the minimum requirements. GAO’s 

analyses of financial data for the first quarter of 2014 indicate the vast majority of 

bank holding companies and banks currently meet the new minimum capital 

ratios and capital conservation buffer (an additional capital requirement) at the 

fully phased-in levels required by 2019. GAO estimated that less than 10 percent 

of the bank holding companies collectively would need to raise less than $5 

billion in total additional capital to cover the capital shortfall. Banks with a shortfall 

tended to be small, with less than $1 billion in assets. The empirical research

GAO reviewed suggests that higher regulatory capital requirements will have a 

modest effect on the cost and availability of credit. Similarly, GAO’s economic 

analysis indicates that raising the additional capital would lead to a modest 

decline in lending and a modest increase in loan rates. According to officials from 

the eight community banks GAO interviewed, they do not anticipate any 

difficulties meeting the capital requirements but expect to incur additional 

compliance costs. Officials from the 10 global systemically important banks that 

GAO interviewed said they have been incurring significant costs to comply with 

the new requirements, but three said that U.S. minimum capital ratios for Basel III

tend not to be the binding capital constraint. Most of these bank officials said they 

expect the requirements to improve the resilience of the banking system. 

 

Jurisdictional differences in the implementation of the Basel III capital standards 

have arisen, but their competitive effect on internationally active banks is unclear. 

Basel III serves, in part, to limit competitive disparities due to differences in 

capital standards, but there are limitations to full harmonization. For example, the 

Basel capital standards have no legal force; rather, members of the Basel 

Committee on Banking Supervision (Basel Committee) developed and agreed to 

the standards, with the expectation that each member will implement them. Thus, 

jurisdictions may adopt requirements more or less stringent than the minimum 

standards. Almost all Basel Committee members report having adopted rules to 

implement the Basel III capital requirements. To help promote a level regulatory 

playing field, the Basel Committee began conducting reviews in 2012 to assess 

whether each member’s implementation meets the Basel III minimum standards 

and whether implementation produced consistent outcomes across jurisdictions. 

These reviews found the rules of the seven members it assessed to date to be 

generally compliant. However, the Basel Committee’s other reviews identified 

some inconsistencies in how banks across different jurisdictions calculated their 

risk-weighted assets. As was the case with Basel II implementation, some banks 

and others are concerned about jurisdictional differences in the implementation 

of Basel III and their effect on competition. For example, some jurisdictions are 

subjecting certain of their banks to capital or leverage requirements above the 

Basel III minimums or exempting banks from certain capital requirements. 

Because Basel III’s implementation is ongoing, the extent to which the 

differences collectively will affect competition among internationally active banks 

is unclear. In addition, other factors can affect the competitive position of 

internationally active banks, such as differences in accounting treatment, cost of 

capital, and tax rules across jurisdictions.

View GAO-15-67. For more information, 

contact Lawrance Evans at (202) 512-8678 or 

evansl@gao.gov.
Page i GAO-15-67 Bank Capital Reforms

Letter 1 

Background 5

U.S. Basel III Capital Requirements May Have a Limited Effect on 

Capital in the Short Term but Are Expected to Increase 

Compliance Costs 15

The Basel Committee Is Taking Steps to Identify Basel III 

Implementation Inconsistencies 33

Agency Comments 52

Appendix I Objectives, Scope, and Methodology 53

Appendix II GAO Analyses of Basel III Minimum Capital Ratios, Capital Shortfall, 

and Funding Costs 57

Appendix III GAO Contact and Staff Acknowledgments 70

Bibliography 71

Tables

Table 1: Federal Banking Regulators and Their Basic Functions 5

Table 2: U.S. Basel III Requirements and Their Applicability to 

Standardized Approach and Advanced Approaches 

Banking Organizations 12

Table 3: Estimated Numbers of Bank Holding Companies and 

Depository Institutions That Met Basel III Minimum Capital 

Ratios as of the First Quarter 2014, by Asset Size 17

Table 4: Median of Estimated Additional Capital Needed to Meet 

Basel III Minimum Capital Ratios as of the First Quarter 

2014, by Asset Size 19

Table 5: Total Estimated Additional Capital Needed to Meet Basel 

III Minimum Requirements as of the First Quarter 2014, by 

Asset Size 20

Contents
Page ii GAO-15-67 Bank Capital Reforms

Table 6: Estimated Changes in Funding Costs (in Percentage 

Points) Associated with Raising Capital Needed to Meet 

Basel III Minimum Requirements as of the First Quarter 

2014, by Asset Size 23

Table 7: Implementation Status of the Basel III Capital Framework 

as Reported by Members of the Basel Committee, as of 

October 2014 35

Table 8: Estimated Number of Bank Holding Companies and 

Depository Institutions That Met Basel III Minimum Capital 

Ratios by Size and Advanced Approaches Status, as of 

the First Quarter 2014 61

Table 9: Median Estimated Additional Capital Needed to Meet 

Basel III Minimum Capital Ratios by Size and Advanced 

Approaches Status, as of the First Quarter 2014 63

Table 10: Total Estimated Additional Capital Needed to Meet 

Basel III Minimum Standards by Size and Advanced 

Approaches Status, as of the First Quarter 2014 65

Table 11: Median Return on Equity, Median Interest Rate on Debt, 

and Estimated Change in Funding Costs Associated with1 

Percentage Point Increase in Equity Capital Ratio by Size 

and Advanced Approaches Status, as of the First Quarter 

2014 67

Table 12: Estimated Changes in Funding Costs Associated with 

Raising Capital Needed to Meet Basel III Minimum 

Standards by Size, as of the First Quarter 2014 

(Percentage Points) 68

Figure

Figure 1: Applicability of U.S. Basel III Capital Regulations to 

Different Types of Foreign Banking Entities 43
Page iii GAO-15-67 Bank Capital Reforms

Abbreviations

Basel Committee Basel Committee on Banking Supervision

Call Reports Consolidated Reports of Condition and Income 

CCAR Comprehensive Capital Analysis and Review 

Collins Amendment Section 171 (b) of the Dodd Frank Wall Street 

 Reform and Consumer Protection Act of 2010

Dodd-Frank Act Dodd-Frank Wall Street Reform and Consumer 

 Protection Act of 2010

FDIC Federal Deposit Insurance Corporation

Federal Reserve Board of Governors of the Federal Reserve 

 System

EU European Union 

G-SIB global systemically important banks 

OCC Office of the Comptroller of the Currency

RCAP Regulatory Consistency Assessment Program 

U.S. IHC U.S. intermediate holding company

Y-9C Consolidated Financial Statements for Holding 

 Companies—Form FR Y-9C

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page 1 GAO-15-67 Bank Capital Reforms

441 G St. N.W.

Washington, DC 20548

November 20, 2014

The Honorable Shelley Moore Capito

Chairman

Subcommittee on Financial Institutions and Consumer Credit

Committee on Financial Services

House of Representatives

Dear Madam Chairman

The 2007-2009 financial crisis revealed that many banking organizations 

lacked capital of sufficient quality and quantity to absorb substantial 

losses.1

In response to the crisis, banking regulators around the world moved to 

strengthen requirements for capital adequacy. In the United States, the 

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 

(Dodd-Frank Act) introduced, among other things, new capital 

requirements for bank holding companies and savings and loan holding 

companies.

Capital reassures an institution’s depositors, creditors, and 

counterparties that unanticipated losses or decreased earnings will not 

impair the institution’s ability to protect the savings of depositors, repay 

creditors, or fulfill their obligations to counterparties. Because of capital’s 

role in absorbing losses, promoting confidence, and protecting depositors, 

federal banking regulations require banking organizations to maintain 

adequate capital, and regulators set minimum capital levels to help 

ensure that institutions do so.

2

 

1

Capital is a source of long-term funding, largely contributed by an institution’s equity 

stockholders and its own returns in the form of retained earnings, which provides 

institutions with a cushion to absorb unexpected losses. In general, capital represents the 

share of an institution’s assets with no obligation for repayment. Because capital generally 

does not have to be repaid, it can serve as a buffer against declines in asset values 

without subjecting an institution to default or insolvency. The strongest form of capital is 

common equity (or common stock), which carries no repayment obligation for principal or 

dividends, has the lowest payment priority in bankruptcy, and has no maturity date. In this 

report, we use banking organizations to refer to both banks and bank holding companies. 

At the international level, in December 2010 the Basel 

2

Pub. L. No 111-203, § 171, 124 Stat. 1376, 1435 (2010). This section is also known as 

the Collins Amendment. A bank or thrift holding company owns or controls one or more 

banks or thrifts or owns or controls one or more bank or thrift holding companies. The 

company at the top of the ownership chain is commonly called the top-tier entity.
 

Page 2 GAO-15-67 Bank Capital Reforms

Committee on Banking Supervision (Basel Committee) issued the Basel 

III framework—a comprehensive set of reforms to strengthen global 

capital and liquidity standards—with the goal of promoting a more resilient 

banking sector.3

In 2013, the U.S. federal banking regulators adopted regulations to 

implement many aspects of the Basel III capital framework that apply to 

banks, savings associations, and top-tier U.S. bank and savings and loan 

holding companies (with certain exceptions).

The leaders of the Group of Twenty (presidents and 

heads of state) endorsed the Basel III framework. The framework has no 

legal force but was issued by the agreement of the Basel Committee 

members with the expectation that individual national authorities would 

implement the standards.

4 In support of their 

regulations, the banking regulators cited analysis by the Basel Committee 

that suggested stronger capital standards will help reduce the likelihood 

of banking crises while yielding positive net economic benefits.5

 

3

Basel Committee on Banking Supervision, Basel III: A Global Regulatory Framework for 

More Resilient Bank and Banking Systems (Basel, Switzerland: December 2010, revised 

June 2011). Established in 1974, the Basel Committee seeks to improve the quality of 

banking supervision worldwide, in part by developing broad supervisory standards. Its 

members represent central bank and regulatory officials from Argentina, Australia, 

Belgium, Brazil, Canada, China, France, Germany, Hong Kong, India, Indonesia, Italy, 

Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, 

South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United 

States.

Although 

the regulations serve to strengthen the long-term quality and quantity of 

the capital base of the U.S. banking system, some banks, industry 

4

For the Treasury’s Office of Comptroller of the Currency and the Federal Reserve Board: 

Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital 

Adequacy, Tradition Provisions, Prompt Corrective Action, Standardized Approach for 

Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced 

Approaches Risk-Based Capital Rule, and Market Risk Capital Rule; Final Rule, 78 Fed. 

Reg. 62018 (Oct. 11, 2013) and for the Federal Deposit Insurance Corporation: 

Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital 

Adequacy, Tradition Provisions, Prompt Corrective Action, Standardized Approach for 

Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced 

Approaches Risk-Based Capital Rule, and Market Risk Capital Rule; Interim Final Rule, 

78 Fed. Reg. 55340 (September 10, 2013). With minor changes, the Federal Deposit 

Insurance Corporation rule became a final rule in April 2014. See 79 Fed. Reg. 20754 

(April 14, 2014).

5

Macroeconomic Assessment Group of the Financial Stability Board and the Basel 

Committee on Banking Supervision, Interim Report: Assessing the Macroeconomic Impact 

of the Transition to Stronger Capital and Liquid Requirements (Basel, Switzerland: August 

2010).
 

Page 3 GAO-15-67 Bank Capital Reforms

associations, and others have raised questions about their potential 

negative impact on U.S. banks, particularly smaller banks, and the 

economy. For example, some maintain that the regulations will reduce

bank profitability, increase the cost or reduce the availability of credit, or 

place U.S. banks at a competitive disadvantage relative to foreign banks. 

You asked us to review issues related to the impact of the new capital 

requirements. This report examines how

• U.S. Basel III capital requirements may affect U.S. banking 

organizations, including smaller banking organizations, and

• implementation of Basel III capital and other standards by different 

countries or other jurisdictions may affect the ability of U.S. banking 

organizations to compete internationally.

For the first objective, we reviewed final and proposed regulations issued 

by the Board of Governors of the Federal Reserve System (Federal 

Reserve), Federal Deposit Insurance Corporation (FDIC), and Office of 

the Comptroller of the Currency (OCC) to implement the Basel III 

framework. We reviewed studies and other analysis on Basel III issued by 

regulators, law firms, consultants, and others, and annual reports and 

regulatory filings issued by publically traded bank holding companies. We 

analyzed data from the Consolidated Financial Statements for Holding 

Companies–Form FR Y-9C (Y-9C) and the Consolidated Reports of 

Condition and Income (Call Reports) for March 2014 to estimate which 

bank holding companies and depository institutions currently would meet 

the Basel III minimum capital ratios, how much capital they would need to 

raise (capital shortfall) to meet the requirements, and the change in 

funding costs for bank holding companies and depository institutions 

associated with the amount of capital they would need to meet the 

minimum capital requirements. To understand how higher capital 

requirements might affect the cost and availability of credit, we reviewed 

empirical studies issued in 2011–2014. We also used our estimates of the 

capital shortfall to estimate the short- and long-run changes in the cost of 

credit associated with bank holding companies and depository institutions 

raising capital to address that shortfall. We interviewed federal bank 

regulators and six associations representing U.S. or foreign banks (or 

both). We also judgmentally selected and interviewed 8 community banks 

(based on their total assets and geographic location) and 10 large, 

internationally active banks (based on their status as global systemically 
 

Page 4 GAO-15-67 Bank Capital Reforms

important banks (G-SIB) and home country) to obtain their views on the 

impact of the U.S. Basel III requirements.6

For parts of our methodology involving analysis of computer-processed 

data, including the Y-9Cs and the Call Reports, we assessed the 

reliability of these data by reviewing relevant documentation and 

electronically testing the data for incorrect values and determined they 

were sufficiently reliable for the purposes of estimating the numbers of 

bank holding companies and depository institutions with capital ratios that 

met or exceeded the new Basel III minimum capital ratios, estimating the 

capital shortfall for those that did not, and estimating the impact on the 

cost and availability of credit of addressing the capital shortfall. For the 

second objective, we reviewed relevant proposed and final rules, 

examination manuals, and other documentation from FDIC, the Federal 

Reserve, and OCC; reports from the Basel Committee, including 

jurisdictional and thematic assessments of its Regulatory Consistency 

Assessment Program (RCAP); and prior GAO studies. We also reviewed 

studies and analysis issued by law firms and consultants on Basel III 

implementation differences across jurisdictions and potential competitive 

implications and interviewed the same stakeholders identified above 

(except for the community banks). For more detailed information about 

our scope and methodology, see appendix I.

We conducted this performance audit from December 2013 to November 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

 

6

In November 2013, the Financial Stability Board published its updated annual list of GSIBs, which generally comprise the largest and most complex internationally active banks. 

There were 29 G-SIBs headquartered in 11 countries: 8 in the United States; 4 each in 

France and the United Kingdom; 3 in Japan; 2 each in China, Spain, and Switzerland; and 

1 each in Germany, Italy, Netherlands, and Sweden.
 

Page 5 GAO-15-67 Bank Capital Reforms

Although depository institutions may have state or federal charters, all 

depository institutions (including banks, savings and loans, and thrifts) 

that have federal deposit insurance are supervised by a federal banking 

regulator. The federal banking regulators—which generally may issue 

regulations and take enforcement actions against institutions in their 

jurisdiction—are identified in table 1. These regulators issued the final 

regulations to implement the Basel III-based capital standards in the 

United States. 

Table 1: Federal Banking Regulators and Their Basic Functions

Agency Basic function 

Office of the Comptroller of the Currency Charters and supervises national banks and federally chartered savings associations. 

Board of Governors of the Federal 

Reserve System

Supervises state-chartered banks that opt to be members of the Federal Reserve

System, bank holding companies, savings and loan holding companies, the nondepository institution subsidiaries of those holding companies, and nonbank financial 

companies designated as systemically important financial institutions by the Financial 

Stability Oversight Council. 

Federal Deposit Insurance Corporation Supervises federally insured state-chartered banks that are not members of the Federal 

Reserve System, as well as federally insured, savings associations; insures the deposits 

of all banks and savings and loan associations that are approved for federal deposit 

insurance; resolves all failed insured banks and savings and loan associations and has 

been given the authority under Title II of the Dodd-Frank Act to resolve large bank 

holding companies and nonbank financial companies that are subject to supervision by 

the Federal Reserve and subject to enhanced prudential standards. 

Source: GAO. | GAO-15-67

Holding companies that own or control a bank or thrift are subject to 

supervision by the Federal Reserve. The Bank Holding Company Act of 

1956 and the Home Owners’ Loan Act of 1933 set forth the regulatory 

frameworks for bank holding companies and savings and loan holding 

Background

Federal Banking 

Regulators
 

Page 6 GAO-15-67 Bank Capital Reforms

companies, respectively.7 The Dodd-Frank Act made the Federal 

Reserve the regulator of savings and loan holding companies.8

Basel III is part of the Basel Committee’s continuous effort to enhance the 

banking regulatory framework and builds on the previous accords (Basel 

I, II, and II.5).

Basel I. Adopted in 1988, the Basel Capital Accord (Basel I) aimed to 

measure capital adequacy (that is, whether a bank’s capital is sufficient to 

support its activities) and establishes minimum capital standards for 

internationally active banks.9

• a target minimum total risk-based capital ratio (the ratio of regulatory 

capital, the numerator, to risk-weighted assets, the denominator) of 8 

percent and tier 1 risk-based capital ratio of 4 percent,

It consists of three basic elements:

• a definition of capital instruments to constitute the numerator of the 

capital-to-risk weighted assets ratio, and

• a system of risk weights for calculating the denominator of the ratio.

A bank’s risk-based capital ratio is the ratio of its regulatory capital to riskweighted assets. Regulatory capital is the numerator of the ratio and risk- 

 

7

Bank Holding Company Act of 1956, Pub. L. No. 84-511, 70 Stat. 133 (1956) (codified as 

amended at 12 U.S.C. §§ 1841-1852); Home Owners’ Loan Act of 1933, Pub. L. No. 73-

43, 48 Stat. 128 (1933) (codified as amended at 12 U.S.C. §§ 1461-1470). A bank holding 

company has control over a bank, or any company that is or becomes a bank holding 

company as defined in the Bank Holding Company Act. 12 U.S.C. § 1841(a)(1), (c). 

Savings and loan holding companies directly or indirectly control a savings association or 

that controls any other company that is a savings and loan holding company. 12 U.S.C. § 

1467a(a)(1)(D).

8

For a more detailed discussion of the regulatory framework for bank holding companies 

and savings and loan holding companies, see GAO, Bank Holding Company Act: 

Characteristics and Regulation of Exempt Institutions and the Implications of Removing 

the Exemptions, GAO-12-160 (Washington, D.C.: Jan. 19, 2012). The Dodd-Frank Act 

abolished the Office of Thrift Supervision, which had regulated and supervised federally 

chartered savings associations and savings and loan holding companies, among others, 

and transferred these responsibilities to OCC and the Federal Reserve, respectively. 

9

The framework is outlined in Basel Committee on Banking Supervision, International 

Convergence of Capital Measurement and Capital Standards (Basel, Switzerland: July 

1988). 

Basel Capital Accord 

Framework
 

Page 7 GAO-15-67 Bank Capital Reforms

weighted assets constitute the denominator. In calculating a total riskweighted asset figure, a bank’s total value of each asset is multiplied by a 

percentage reflecting its risk level and this adjusted amount is added 

across all assets. At a high level, the standardized approach to 

calculating risk-weighted assets involves multiplying the amount of the 

asset or exposure by the standardized risk weight (percent) associated 

with that type of asset or exposure. For example, a $1 million mortgage 

with a 50 percent risk-weighting would generate a risk-weighted asset of 

$500,000. If a bank were trying to hold capital equal to 10 percent of its 

risk-weighted asset, then it would need $50,000 of capital to hold against 

this mortgage. Bank capital rules prescribe the standardized risk weights 

and reflect regulatory judgment about the riskiness of an asset type or 

exposure. Holding equity (or the numerator) constant, a higher 

standardized risk weight results in a higher risk-weighted asset amount, 

which gives rise to a lower risk-based capital ratio. Over time, bank 

regulators realized that Basel I was not providing a sufficiently accurate 

measure of capital adequacy because of the lack of risk sensitivity in its 

credit risk weightings, financial market innovations such as securitization 

and credit derivatives, and advancements in banks’ risk measurement 

and risk management techniques. The accord was revised and enhanced 

multiple times after 1988 because of its shortcomings. For example, 

Basel I was amended in 1996 to take explicit account of market risk in 

trading accounts.10

Basel II. Adopted in June 2004, Basel II aimed to better align minimum 

capital standards with enhanced risk measurement and encourage banks 

to develop a more disciplined approach to risk management.11

 

10Market risk is the potential for loss resulting from movements in market prices, including 

interest rates, commodity and stock prices, and foreign exchange rates. Generally, under 

the market risk amendment, banks use internal models to estimate the 99th percentile of 

their market risk loss distribution over a 10-business-day horizon (in other words, a 

solvency standard designed to exceed trading losses for 99 of 100 10-business-day 

intervals).

It consists 

of three pillars: minimum capital requirements, a supervisory review of an 

institution’s internal assessment process and capital adequacy, and use 

of disclosures to strengthen market discipline as a complement to 

supervisory efforts. Basel II includes a standardized approach (which 

11See Basel Committee on Banking Supervision, Basel II: International Convergence of 

Capital Measurement and Capital Standards: A Revised Framework (Basel, Switzerland: 

June 2004).
 

Page 8 GAO-15-67 Bank Capital Reforms

does not rely on banks’ internal models) and advanced approaches for 

measuring credit and operational risks. The advanced approaches 

generally are applied by large internationally active banks. The advanced 

approaches for credit risk and operational risk use parameters from a 

bank’s internal systems as inputs into a formula that supervisors 

developed for calculating risk-based capital ratios. In addition, banks with 

significant trading assets (which banks use to hedge risks or speculate on 

price changes in markets for themselves or their customers) must 

calculate capital for market risk using internal models. The advanced 

approaches allow some bank holding companies to reduce capital from 

Basel I. Large internationally active U.S. bank holding companies have 

been implementing the first phase—known as the parallel run—of the 

Basel II advanced approaches.12 As of February 21, 2014, eight 

advanced approaches bank holding companies had exited their parallel 

run, and the Federal Reserve and OCC jointly permitted them to use the 

advanced approaches to determine their risk-based capital requirements 

subject to the Collins Amendment floor. Banking organizations in most 

other industrialized countries are subject to the Basel II capital standards. 

In 2009, the Basel Committee issued Basel II.5 to enhance the 

measurements of risks related to securitization and trading book 

exposures.13

Basel III. Adopted in 2010 and revised in 2011 and 2013, Basel III aims 

to improve the banking sector’s ability to absorb shocks arising from 

 

12Before the enactment of the Dodd-Frank Act, the four phases of the advanced 

approaches were (1) the parallel run—four consecutive quarters in which a bank meets 

the qualification requirements and is subject to Basel I, but simultaneously calculates its 

risk-based capital ratios under the advanced approaches; (2) the first transitional period—

at least four consecutive quarters in which the bank computes its risk-based capital ratios 

using Basel I and the advanced approaches rule, and required risk-based capital must be 

at least 95 percent of the Basel I requirement; (3) the second transitional period—at least 

four consecutive quarters in which the bank computes its risk-based capital ratios using 

Basel I and the advanced approaches rule, and required risk-based capital must be at 

least 90 percent of the Basel I requirement; and (4) the third transitional period—at least 

four consecutive quarters in which the bank computes its risk-based capital ratios using 

Basel I and the advanced approaches rule, and required risk-based capital must be at 

least 85 percent of the Basel I requirement. In addition, section 171 of the Dodd-Frank 

Act (known as the Collins Amendment) has the effect of eliminating the transitional 

periods as they would apply in the United States and established a permanent capital 

floor. 

13Revisions to the Basel II market risk framework, July 2009 (updated on Dec. 31, 2010, 

and in February 2011), and guidelines for computing capital for incremental risk in the 

trading book, issued in July 2009.
 

Page 9 GAO-15-67 Bank Capital Reforms

financial and economic stress, whatever the source; improve risk 

management and governance; and strengthen banks’ transparency and 

disclosures. The reforms address bank-level, or micro-prudential, 

regulation to enhance the resilience of individual banking institutions in 

periods of stress and systemwide risks that can build up across the 

banking sector and the amplification of these risks over time. Basel III 

significantly changes the risk-based capital standards for banks and bank 

holding companies and introduces new leverage and liquidity standards.14

Liquidity is a measure of the ability and ease with which assets can be 

converted to cash.15

• a new minimum common equity tier 1 capital requirement of 4.5 

percent of risk-weighted assets (the capital needed to be regarded as 

a viable concern);

More specifically, the new standards include

• a new capital conservation buffer of more than 2.5 percent of common 

equity tier 1 capital to provide a cushion to help companies remain 

above the 4.5 percent minimum during financial shocks and to avoid 

restrictions on distributions and discretionary bonus payments; and

• more stringent risk-weights on certain types of risky assets, 

particularly securitizations and derivatives.16

 

14See Basel III: A Global Regulatory Framework; and Basel Committee on Banking 

Supervision, Basel III: International Framework for Liquidity Risk Measurement, Standards 

and Monitoring (Basel, Switzerland: December 2010, revised June 2011). 

15Liquid assets can be converted to cash quickly if needed to meet financial obligations; 

examples generally include cash, central bank reserves, and government debt. To remain 

viable, a bank must have enough liquid assets to meet its near-term obligations, such as 

withdrawals by depositors. 

16A derivative is a financial contract the value of which derives from the values of one or 

more underlying assets, reference rates or indexes of assets’ values or reference rates.

Derivatives contracts include interest rate derivative contracts, exchange rate derivative 

contracts, equity derivative contracts, commodity derivative contracts, credit derivative 

contracts, and any other instrument that poses similar counterparty credit risks. A credit 

derivative is a financial contract executed under standard industry credit derivative 

documentation that allows one party (the protection purchaser) to transfer the credit risk of 

one or more exposures (reference exposure(s)) to another party (the protection provider) 

for a certain period of time. Securities financing transactions include a variety of secured 

transactions that have similar economic effects such as lending or borrowing securities 

and commodities, repurchase (repo) or reverse repurchase transactions, and buy-sell 

back or sell-buy back transactions. The main securities financing transactions are 

securities lending and repos. 
 

Page 10 GAO-15-67 Bank Capital Reforms

Basel III defines capital more narrowly than the previous accords. The 

new common equity tier 1 capital measure is limited mainly to common 

equity, because common equity generally is the most loss-absorbing 

instrument during a crisis. Basel III also includes a leverage ratio and two 

liquidity ratios (see table 2).

In 2013, federal banking regulators adopted regulations to implement 

Basel III’s minimum regulatory capital ratios, capital conservation buffer 

ratio, countercyclical capital buffer, and supplementary leverage ratio (as 

applicable to advanced approaches banking organizations).17

• bank holding companies with assets of $500 million or more and all 

non-exempt savings and loan holding companies;

These 

regulations apply to

• national banks and federally chartered savings associations; and

• state-chartered banks (both non-member and member banks) and 

state savings associations.18

Certain savings and loan association holding companies with significant 

commercial or insurance underwriting activities or assets currently are 

exempt from the requirements of the U.S. Basel III capital regulation.19

 

1778 Fed. Reg. 62018 (Oct. 11, 2013) and 78 Fed. Reg. 55340 (Sept. 10, 2013). With 

minor changes, the September 2013 FDIC interim final rule became a final rule in April 

2014. See 79 Fed. Reg. 20754 (Apr. 14, 2014). In May 2014, federal banking regulators 

proposed a rule to revise the supplementary leverage ratio to align more closely the 

calculation of total leverage exposure with international leverage ratio standards (79 Fed. 

Reg. 24596 (May 1, 2014)). In September 2014, the federal banking regulators issued the 

final rule. (79 Fed. Reg. 57725 (Sept. 26, 2014). 

18 The rule does not apply to bank holding companies with less than $500 million in assets 

that are not engaged in significant nonbanking activities; that do not conduct significant 

off-balance sheet activities; and do not have a material amount of debt or equity securities 

registered with the Securities and Exchange Commission. These small bank holding 

companies remain subject to the Federal Reserve’s Small Bank Holding Company Policy 

Statement. See 12 C.F.R. part 225, appendix C. Section 171 of the Dodd-Frank Act 

provides an exemption from its requirements for bank holding companies subject to the 

Small Bank Holding Company Policy Statement. 12 U.S.C. § 5371(b)(5)(C).

19Exempt savings and loan holding companies include the following: grandfathered 

unitary savings and loan holding companies substantially engaged in commercial 

activities, and savings and loan holding companies that are insurance underwriting 

companies or are substantially engaged in insurance underwriting activities.

U.S. Implementation of 

Basel III and Other 

Banking Reforms
 

Page 11 GAO-15-67 Bank Capital Reforms

The U.S. Basel III capital regulation seeks to improve the overall 

resilience of the banking system by imposing more stringent regulatory 

capital and related requirements on banking organizations. While the 

Basel III framework was primarily directed at internationally active banks, 

federal banking regulators generally apply the U.S. Basel III capital 

regulations to all banking organizations—maintaining that this approach 

will lead to a more stable and resilient system for banking organizations of 

all sizes and risk profiles.

As shown in table 2, all banking organizations are subject to the 

standardized approach and minimum regulatory capital requirements, but 

advanced approaches banking organizations are also subject to 

additional requirements. Advanced approaches banks are defined as 

those with consolidated total assets of $250 billion or more or with 

consolidated total on-balance-sheet foreign exposure of $10 billion or 

more. The U.S. Basel III regulations generally provide until 2019 to 

phase in certain provisions in the regulatory capital requirements.20 In 

addition to meeting the minimum regulatory capital ratios, banking 

organizations must meet the capital conservation buffer to avoid 

restrictions on capital distributions and discretionary bonus payments to 

executive officers. Advanced approaches banking organizations are 

subject to the countercyclical capital buffer, supplementary leverage ratio, 

and liquidity coverage ratio. Moreover, under section 171 of the DoddFrank Act, the Collins Amendment (discussed below) advanced 

approaches banking organizations will be required to calculate their riskbased capital ratios using both the standardized and advanced 

approaches methodologies and use the lower of each capital ratio to 

determine compliance with minimum capital requirements.

 

20The regulatory capital phase-in period for advanced approaches banking organizations 

began in January 2014. The phase-in period for standardized approach banking 

organizations will not begin until January 2015. The Basel framework includes 

implementation of certain provisions by 2019, but in certain transitional rules, the U.S. 

Basel III capital rules provide until 2021 for phasing in certain requirements, such as the 

percentage of nonqualifying capital instruments issued before September 12, 2010, that 

can be included in additional tier 1 or tier 2 capital.
 

Page 12 GAO-15-67 Bank Capital Reforms

Table 2: U.S. Basel III Requirements and Their Applicability to Standardized Approach and Advanced Approaches Banking 

Organizations

U.S Basel III requirement

Standardized approach

banking organizations

Advanced approaches

banking organizations

Minimum regulatory capital ratios Yes Yes

Common equity tier 1 capital ratio: common equity tier 1 capital ratio to 

total risk-weighted assets (4.5 percent)a

Tier 1 capital ratio: tier 1 capital to total risk-weighted assets (6 percent)

Total risk-based capital ratio: sum of tier 1 and tier 2 capital divided by 

total risk-weighted assets (8 percent)

Capital conservation buffer

The buffer is composed entirely of common equity tier 1 capital (greater 

than 2.5 percent)b

Yes

 

Yes

Countercyclical capital buffer

Set by regulator with respect to the loan book and other credit 

exposures in its jurisdiction and applied on a consolidated level on a 

weighted-average basis (0.0 percent to 2.5 percent) 

No Yes

Leverage ratio

Ratio of tier 1 capital to average total consolidated assets in the balance 

sheet (4 percent)

Yes Yes

Supplementary leverage ratio

Tier 1 capital divided by total leverage exposure, which includes onbalance sheet exposures, derivative exposures, securities financing 

transaction exposures, and other off-balance sheet exposures (3 

percent)

No

c

Yes

Liquidity coverage ratio

An amount of high-quality liquid assets that is no less than 100 percent 

of its total net cash outflows over a prospective 30 calendar-day period

A less stringent modified ratio 

for bank holding companies 

and non-exempt savings and 

loan holding companies with 

assets of $50 billion or more

Yes

Net stable funding ratio

An amount of available stable funding relative to the amount of required 

stable funding

Not applicable

d

Not applicable

Source: GAO analysis of Federal Register releases.| GAO-15-67

a

Common equity tier 1 capital includes in part common shares and retaining earnings. Tier 1 capital in 

part is the sum of common equity tier 1 capital and additional tier 1 (which can include non-cumulative 

perpetual preferred shares.

b

A banking organization must maintain a capital conservation buffer of common equity tier 1 capital in 

an amount greater than 2.5 percent of total risk-weighted assets to avoid being subject to limitation on 

capital distributions and discretionary bonus payments to executive officers.

c

In January 2014, the Basel Committee adopted revisions to the Basel III leverage ratio that included 

in the off-balance sheet items (1) the effective notational principal amount of credit derivatives or 

similar instruments through which a banking organization provides credit protection; (2) modifications 

to the measure of exposure for derivatives and repurchase transactions; and (3) revisions to the 

credit conversion factors for certain off-balance-sheet exposures. The federal banking regulators 

finalized revisions to the U.S. supplementary leverage ratio in September 2014. See, 79 Fed. Reg. 

57725 (Sept. 26, 2014).
 

Page 13 GAO-15-67 Bank Capital Reforms

d

On October 31, 2014, the Basel Committee issued the final standard for the net stable funding ratio.

Available stable funding is defined as the portion of capital and liabilities expected to be reliable over 

the time horizon considered by the net stable funding ratio, which extends to 1 year. The amount of 

such stable funding required of a specific institution is a function of the liquidity characteristic and 

residual maturities of the various assets held by that institution as well as those of its off-balancesheet exposures. The federal banking regulators have not drafted a proposed regulation to implement 

the net stable funding ratio.

In response to public comments about the potential implementation 

burden on small banking organizations, the federal banking regulators 

made several revisions to the proposed U.S. Basel III regulations to help 

minimize the regulatory burden on such organizations. These revisions 

include retaining the existing risk weights for residential mortgages; giving 

all standardized approach banking organizations the option to elect to 

retain the current treatment of accumulated other comprehensive income 

in their regulatory capital; and grandfathering the regulatory capital 

treatment of trust preferred securities issued by banking organizations 

(less than $15 billion in assets as of 2009) before May 19, 2010.21

In addition to the Basel III framework, U.S. banking regulators have 

implemented several other major financial reforms and supervisory 

practices covering banking organizations. They include the following:

• Dodd-Frank stress tests. Under the Dodd-Frank Act, banking 

organizations with consolidated assets of more than $10 billion must 

conduct and report on an annual company-run stress test. Nonbank 

financial companies supervised by the Federal Reserve and bank 

holding companies with more than $50 billion in consolidated assets 

must also conduct semi-annual stress tests. The act requires that the 

banking agencies issue regulations that establish methodologies for 

the conduct of the company-run stress-tests that provide for at least 

three different sets of economic conditions, establish the form and 

content of the report that the companies must submit to the 

regulators, and require companies to publish a summary of the results 

of the required stress tests. In October 2012, the Federal Reserve, 

 

21Accumulated other comprehensive income generally includes accumulated unrealized 

gains and losses on certain assets and liabilities that have not been included in net 

income, yet are included in equity under U.S. generally accepted accounting principles. 

Trust preferred securities are cumulative preferred stock instruments issued by a specialpurpose entity (usually in the form of a trust) established by a bank holding company. The 

bank holding company issues subordinated debt to the special-purpose entity which uses 

the bank holding company’s interest payments on the debt to make payments to the 

preferred stock investors. 
 

Page 14 GAO-15-67 Bank Capital Reforms

FDIC, and OCC issued final rules implementing the company-run 

stress test requirements. Community banks with less than $10 billion 

in total assets are not required or expected to conduct the types of 

stress testing specifically articulated in the regulations directed toward 

larger organizations.22 For bank holding companies with $50 billion or 

more in assets and nonbank financial companies designated for 

supervision by the Federal Reserve, the Federal Reserve must 

conduct an annual supervisory stress test to evaluate whether the 

company has sufficient capital to absorb losses as a result of adverse 

economic conditions. The Federal Reserve must publish a summary 

of the supervisory stress test results.

• Capital planning. Pursuant to the Federal Reserve’s capital plan rule 

and related supervisory process, the Federal Reserve assesses the 

internal capital planning process of each bank holding company with 

total consolidated assets of $50 billion or more and its ability to 

maintain sufficient capital to continue its operations under stressful 

conditions. Under the capital plan rule a bank holding company must 

submit an annual capital plan or planned capital distribution in which it

demonstrates that it can maintain capital ratios above minimum 

regulatory requirements and a tier 1 common equity ratio greater than 

5 percent under stressed economic and financial market conditions. 

The capital plan must include detailed descriptions of all planned 

capital actions: the company’s internal processes for assessing capital 

adequacy; the policies governing capital actions such as common 

stock issuance, dividends, and share repurchases; and all planned 

capital actions over a 9-quarter planning horizon. If the Federal 

Reserve objects to its capital plan, a bank holding company may not 

make any capital distributions, unless approved in writing by the 

Federal Reserve.

• Activity restrictions. The final rule implementing Section 619 of the 

Dodd-Frank Act, commonly known as the Volcker rule, was adopted 

by the Federal Reserve, FDIC, OCC, and the Securities and 

Exchange Commission on December 10, 2013. The Volcker final rule 

prohibits insured depository institutions and companies affiliated with 

insured depository institutions, from engaging in short-term proprietary 

trading of certain securities, derivatives, commodity futures, and 

 

22See 

https://www.fdic.gov/news/news/press/2012/pr12054a.pdf (guidance on stress testing 

expectation for community banks).
 

Page 15 GAO-15-67 Bank Capital Reforms

options on those instruments for their own accounts. The final rule 

also imposes limits on banking entities’ investments in hedge funds or 

private equity funds, subject to certain exceptions.

• Minimum capital requirements. Section 171 (b) of the Dodd Frank 

Act (Collins Amendment) requires federal banking agencies to apply 

to, among others, U.S. depository institution holding companies and 

systemically significant nonbank financial companies, the minimum 

risk-based and leverage capital requirements that apply to insured 

depository institutions. The minimum requirements cannot be 

quantitatively lower than the capital requirements that were in effect 

when the Dodd-Frank Act was enacted.

The vast majority of banks and bank holding companies already would 

likely be able to meet the new minimum capital requirements and capital 

conservation buffer at the fully phased-in levels required by 2019. We

estimated that as of first quarter 2014 more than 90 percent of bank 

holding companies currently meet the new requirements and that those 

with insufficient capital would need to raise about $4 billion to 5 billion in 

capital to cover the capital shortfall and meet the requirements. Our 

analysis also suggests that most of the bank holding companies and 

depository institutions that did not hold sufficient capital to meet the Basel 

III minimums, plus the capital conservation buffer, are relatively small, 

with assets of less than $1 billion. The empirical findings from our 

literature review and analysis of the capital shortfall suggest that the 

higher capital requirements likely will have a modest effect on the cost 

and availability of credit. Some market participants we interviewed (eight 

community banks and 10 G-SIBs) generally expected the U.S. capital 

requirements to increase compliance costs but have a limited effect on 

the cost and availability of credit.

Our analysis suggests that as of the first quarter of 2014, the majority of 

bank holding companies and depository institutions met U.S. Basel III 

minimum capital ratios, including the capital conservation buffer, at the 

fully phased-in levels required by 2019. Furthermore, the total amount of 

capital these institutions would need to meet Basel III ratios—the capital 

shortfall—is relatively modest. To estimate the extent to which bank 

holding companies and depository institutions already met the fully 

U.S. Basel III Capital 

Requirements May 

Have a Limited Effect 

on Capital in the 

Short Term but Are 

Expected to Increase 

Compliance Costs

Analysis Suggests Most 

Bank Holding Companies 

and Depository Institutions 

Currently Would Meet New 

Minimum Regulatory 

Capital Requirements
 

Page 16 GAO-15-67 Bank Capital Reforms

phased-in Basel III minimum capital ratios, we analyzed balance sheet 

data for bank holding companies and depository institutions for the first 

quarter of 2014.23 We estimated common equity tier 1 capital, tier 1 

capital, total capital, and risk-weighted assets using calculations 

consistent with the regulations federal banking regulators adopted in 

2013, which changed the formulas for calculating these amounts.24 In 

addition, we report the estimates separately for the 16 advanced 

approaches bank holding companies (including their bank subsidiaries), 

which accounted for nearly 75 percent of the total assets held by top-tier 

U.S. bank holding companies but less than 2 percent of the number of all 

such holding companies (as of the first quarter of 2014).25

A majority of bank holding companies and depository institutions that we 

analyzed currently would meet each of the separate Basel III minimum 

capital requirements if the regulations took effect immediately without a 

phase-in period.26 As shown in table 3, our analysis suggests that 953 of 

the 1,040 of the bank holding companies (over 92 percent) currently hold 

sufficient capital to meet the new minimum common equity tier 1 capital 

ratio, plus the capital conservation buffer. Similarly, 6,687 of the 6,794 

depository institutions (about 98 percent) currently hold sufficient capital 

to meet the new minimum common equity tier 1 capital ratio, plus the 

capital conservation buffer. Our analysis also suggests that most of the 

bank holding companies and depository institutions that did not hold 

sufficient capital to meet the Basel III minimums, plus the capital 

conservation buffer, are relatively small, with assets of less than $1 

billion.

 

23Because savings and loan holding companies currently are not subject to regulatory 

capital reporting requirements, we were unable to use regulatory reporting information to 

estimate capital and risk-weighted assets under the final regulation for some of these 

institutions. 

24See appendix I for a detailed description of our methodology.

25We identified the advanced approaches banking organizations using Form 10-K filings 

and other publicly available information. 

26For a more detailed analysis of the minimum Basel III capital ratios presented 

throughout this section, see appendix II.

Basel III Minimum Capital 

Requirements
 

Page 17 GAO-15-67 Bank Capital Reforms

Table 3: Estimated Numbers of Bank Holding Companies and Depository Institutions That Met Basel III Minimum Capital 

Ratios as of the First Quarter 2014, by Asset Size

Bank holding companies

Estimated capital ratio

greater than or equal to Basel III minimum?

$500 

million1 billion

in assets

$1 billion10 billion

in assets

$10 billion50 billion

in assets

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50 billion

or more

in assets, 

advanced 

approaches Total

Common equity tier 1 capital ratio plus 

capital conservation buffer (7.0 percent)

No 60 25 2 0 0 87

Yes 476 396 48 17 16 953

Tier 1 capital ratio plus capital 

conservation buffer (8.5 percent)

No 79 45 4 1 1 130

Yes 457 376 46 16 15 910

Total capital ratio plus capital 

conservation buffer (10.5 percent)

No 88 51 4 0 0 143

Yes 448 370 46 17 16 897

Total 536 421 50 17 16 1,040

Depository institutions

Estimated capital ratio

greater than or equal to Basel III minimum?

Less than 

$1 billion 

in assets

$1 billion10 billion

in assets

$10 billion50 billion

in assets

$50 billion 

or more

in assets

Subsidiaries 

of advanced 

approaches 

holding 

companies Total

Common equity tier 1 capital ratio plus 

capital conservation buffer (7.0 percent)

No 103 4 0 0 0 107

Yes 6,011 559 63 18 36 6,687

Tier 1 capital ratio plus capital 

conservation buffer (8.5 percent)

No 137 8 1 0 0 146

Yes 5,977 555 62 18 36 6,648

Total capital ratio plus capital 

conservation buffer (10.5 percent)

No 218 16 2 0 0 236

Yes 5,896 547 61 18 36 6,558

Total 6,114 563 63 18 36 6,794

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to assumptions the Federal Reserve 

made for a comparable analysis. We used our estimates of the amounts of capital and risk-weighted 

assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 capital to 

risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average assets for 

each bank holding company and depository institution. We then compared the estimated capital ratios 

to the Basel III minimum capital ratios, with and without the capital conservation buffer, and counted 

the numbers of bank holding companies and depository institutions with estimated capital ratios that 

met and did not meet the Basel III minimum capital ratios.
 

Page 18 GAO-15-67 Bank Capital Reforms

The capital shortfalls for individual bank holding companies and 

depository institutions that did not meet the Basel III minimum capital 

ratios appeared to be relatively modest in some cases but may be 

significant in others. For example, as shown in table 4, our analysis 

suggests that most bank holding companies that did not meet the new 

minimum common equity tier 1 capital ratio, plus the capital conservation 

buffer, would need to raise no more than $0.01 billion ($10 million) in 

additional common equity tier 1 capital—about 1.65 percent of assets— 

to meet the new requirements. However, at least one of these bank 

holding companies may need to raise at least $1.12 billion—about 3.39 

percent of its assets. Similarly, most depository institutions that did not 

meet the new minimum common equity tier 1 capital ratio, plus the capital 

conservation buffer, would need to raise less than $0.01 billion in 

additional common equity tier 1 capital, or about 1.52 percent of total 

assets, to meet the new requirements. However, some of these 

depository institutions would need to raise capital in excess of 2.4 percent 

of their assets.

Regulatory Capital Shortfall
 

Page 19 GAO-15-67 Bank Capital Reforms

Table 4: Median of Estimated Additional Capital Needed to Meet Basel III Minimum Capital Ratios as of the First Quarter 2014, 

by Asset Size

Bank holding companies

Median estimated additional capital 

needed to meet Basel III minimum 

capital ratio for bank holding companies 

with estimated capital ratios less than 

Basel III minimum

$500 

million1 billion

in assets

$1 billion10 billion

in assets

$10

billion-50 

billion

in assets

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50 billion

or more

in assets, 

advanced 

approaches All

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions 0.01 0.02 1.12 —- —- 0.01

% Assets 1.86 1.40 3.39 —- —- 1.65

Tier 1 capital plus capital conservation 

buffer

$ Billions 0.01 0.01 0.15 0.01 0.02 0.01

% Assets 1.53 0.63 0.93 0.01 0.01 1.03

Total capital plus capital conservation 

buffer

$ Billions 0.01 0.02 0.15 —- —- 0.01

% Assets 1.16 0.73 1.07 —- —- 1.00

Depository institutions

Median estimated additional capital 

needed to meet Basel III minimum 

capital ratio for depository institutions 

with estimated capital ratios less than 

Basel III minimum

Less 

than $1 

billion

in assets

$1 billion10 billion

in assets

$10

billion-50 

billion

in assets

$50 billion 

or more

in assets

Subsidiaries 

of advanced 

approaches 

holding 

companies All

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions <0.01 0.04 —- —- —- <0.01

% Assets 1.52 2.40 —- —- —- 1.52

Tier 1 capital plus capital conservation 

buffer

$ Billions <0.01 0.02 0.18 —- —- <0.01

% Assets 1.62 1.16 1.52 —- —- 1.60

Total capital plus capital conservation 

buffer

$ Billions <0.01 0.02 0.07 —- —- <0.01

% Assets 1.23 0.83 0.22 —- —- 1.21

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to assumptions the Federal Reserve 

made for a comparable analysis. We used our estimates of the amounts of capital and risk-weighted 

assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 capital to 

risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average assets for 

each bank holding company and depository institution. We then compared the estimated capital ratios 

to the Basel III minimum capital ratios, with and without the capital conservation buffer. For each 

capital ratio, for bank holding companies and depository institutions with capital ratios less than the 

Basel III minimums, we calculated the amount of capital required to meet the Basel III minimum (the 

capital shortfall), both in billions of dollars and as a percentage of total assets.

Finally, as shown in table 5, our estimates of the total capital shortfall for 

all bank holding companies and depository institutions are relatively 
 

Page 20 GAO-15-67 Bank Capital Reforms

modest. For example, bank holding companies that did not meet the 

Basel III minimum common equity tier 1 capital ratio, plus the capital 

conservation buffer, would need to raise about $4.73 billion in common 

equity tier 1 capital to eliminate the capital shortfall. This amount equals 

about 0.03 percent of the combined total assets of all the bank holding 

companies we analyzed. Similarly, depository institutions that did not 

meet the minimum common tier 1 capital ratio, plus the capital 

conservation buffer, would need to raise about $0.76 billion to eliminate 

the capital shortfall. This amount equals about 0.01 percent of the 

combined total assets of all depository institutions.

Table 5: Total Estimated Additional Capital Needed to Meet Basel III Minimum Requirements as of the First Quarter 2014, by 

Asset Size

Bank holding companies

Total estimated additional capital 

needed to meet Basel III minimum 

capital ratios for all bank holding 

companies combined

$500 

million- 

$1 billion

in assets

$1 billion10 billion

in assets

$10 billion50 billion

in assets

$50 billion

or more

in assets,

not advanced 

approaches

$50 billion

or more

in assets, 

advanced 

approaches Total

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions 1.00 1.48 2.24 0 0 4.73

% Assets 0.28 0.13 0.22 0 0 0.03

Tier 1 capital plus capital conservation 

buffer

$ Billions 1.04 1.17 2.76 0.01 0.02 5.00

% Assets 0.29 0.11 0.27 <0.01 <0.01 0.03

Total capital plus capital conservation 

buffer

$ Billions 1.04 1.25 3.13 0 0 5.42

% Assets 0.29 0.11 0.31 0 0 0.03

Depository institutions

Total estimated additional capital 

needed to meet Basel III minimum 

capital ratios for all depository 

institutions combined

Less than 

$1 billion 

in assets

$1 billion10 billion 

in assets

$10 billion50 billion 

in assets

$50 billion or 

more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies Total

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions 0.49 0.27 0 0 0 0.76

% Assets 0.04 0.02 0 0 0 0.01

Tier 1 capital plus capital conservation 

buffer

$ Billions 0.66 0.21 0.18 0 0 1.05

% Assets 0.05 0.01 0.01 0 0 0.01

Total capital plus capital conservation 

buffer

$ Billions 0.88 0.54 0.14 0 0 1.57

% Assets 0.06 0.04 0.01 0 0 0.01

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 
 

Page 21 GAO-15-67 Bank Capital Reforms

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or that do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to assumptions the Federal Reserve 

made for a comparable analysis. We used our estimates of the amounts of capital and risk-weighted 

assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 capital to 

risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average assets for 

each bank holding company and depository institution. We then compared the estimated capital ratios 

to the Basel III minimum capital ratios, with and without the capital conservation buffer. For each 

capital ratio, we then calculated the total capital shortfall for all bank holding companies and 

depository institutions with insufficient capital in billions of dollars and as a percentage of the total 

assets of all the bank holding companies and depository institutions.

Our estimates of the numbers of bank holding companies and depository 

institutions with capital ratios exceeding Basel III minimums and the 

capital shortfall are subject to limitations. Most importantly, the amounts 

of some balance sheet and income statement items used to calculate the 

amount of capital or the amount of risk-weighted assets cannot be 

observed for bank holding companies or depository institutions not 

subject to the advanced approaches rule. We made assumptions about 

these unobservable amounts that are similar to assumptions the Federal 

Reserve made for a comparable analysis.27

In addition, our analysis suggests that raising capital to cover the capital 

shortfall would have a modest effect on bank holding company and 

depository institution funding costs. Funding costs are determined by the 

prices of equity and debt financing sources and the amounts used of 

each. Because interest payments on debt are tax-deductible, a more 

leveraged capital structure reduces corporate taxes, lowering funding 

costs. Thus, an increase in the required amount of equity capital would 

However, we cannot assess 

the extent to which our estimates overstate or understate the numbers of 

bank holding companies and depository institutions that already meet 

Basel III capital requirements or the capital shortfall. In addition, some 

bank holding companies and depository institutions may prefer to 

maintain a capital buffer in excess of the required minimum levels to 

satisfy investors or other market participants. Thus, our estimates may 

understate the number of bank holding companies and depository 

institutions that would need to raise capital and also may understate the 

amount of capital they would need to raise.

 

27For example, see, Examining the Impact of the Proposed Rules to Implement Basel III 

Capital Standards, Before the House Committee on Financial Services, Subcommittee on 

Financial Institutions and Consumer Credit and Subcommittee on Insurance, Housing, and 

Community Opportunity, 112th Congr., 2nd sess. (Nov. 29, 2012) (testimony of Michael S. 

Gibson, Director, Division of Banking Supervision and Regulation, Board of Governors of 

the Federal Reserve System). 

Funding and Other Costs
 

Page 22 GAO-15-67 Bank Capital Reforms

increase a bank’s cost of capital. The increased funding cost associated 

with a 1 percentage point increase in the capital ratio of a bank holding 

company or depository institution is approximately equal to the difference 

between the return on equity and the after-tax interest rate on debt, all 

else being equal.28

For bank holding companies and depository institutions that as of the first 

quarter of 2014 did not hold sufficient capital to meet the fully phased-in 

U.S. Basel III capital requirements, our estimates of the increase in 

funding cost associated with raising capital up to the minimum 

requirements are relatively modest.29 As discussed above (see table 5), 

we estimated the amount of common equity tier 1 capital that the median 

capital-deficient bank holding company would need to raise to meet the 

minimum common equity tier 1 capital requirement, plus capital 

conservation buffer, to be about $10 million, or 1.65 percent of its total 

assets. As shown in table 6, the increase in funding cost associated with 

raising this amount of common equity tier 1 capital is about 0.13 

percentage points, or about $13,000 for a bank holding company with $10 

billion in assets.30

 

28Funding costs are invariant to changes in the capital ratio if taxes are neutral; capital 

markets are frictionless, so there are no transactions costs, asset trade restrictions, or 

bankruptcy costs; access to credit markets is symmetric, so firms and investors can 

borrow or lend at the same rate; and firm financial policy reveals no information. Under 

these conditions, changes in the capital ratio lead to changes in equity returns that leave 

funding costs unchanged. However, we explicitly assume that taxes are not neutral. We 

also assume that returns on equity and interest rates on debt do not change when a bank 

holding company or depository institution increases its capital ratio. We note that this 

effect could be offset to some extent if the additional capital protection caused the riskpremiums demanded by an institution’s investors to decline sufficiently.

Similarly, the increase in funding cost associated with 

raising the median amount of common equity tier 1 capital for a capitaldeficient depository institution is about 0.11 percentage points, or about 

$11,000 for a depository institution with $10 billion in assets (based on 

the amount of such capital the median capital-deficient depository 

institution would need to raise to meet the minimum requirements).

29For additional details on the analyses, see appendix II. 

30At the median return on equity and interest rate on debt for all bank holding companies 

in the first quarter of 2014 of about 8.3 percent and 0.6 percent, respectively, and 

assuming a corporate income tax rate of 35 percent, the change in funding cost 

associated with a 1.65 percentage point increase in the capital-to-assets ratio is about 

0.13 percentage points.
 

Page 23 GAO-15-67 Bank Capital Reforms

Table 6: Estimated Changes in Funding Costs (in Percentage Points) Associated with Raising Capital Needed to Meet Basel III 

Minimum Requirements as of the First Quarter 2014, by Asset Size 

Bank holding companies

Estimated change in funding costs from 

raising median estimated amount of capital 

needed to meet Basel III minimum capital 

ratio for bank holding companies with 

estimated capital ratio less than Basel III 

minimum

$500 million-1 

billion in assets

$1 billion-10 

billion in 

assets 

$10 billion50 billion 

in assets

$50 billion or 

more in 

assets, not 

advanced 

approaches

$50 billion or 

more in 

assets, 

advanced 

approaches All

Common equity tier 1 capital plus capital 

conservation buffer

0.14 0.12 0.27 —- —- 0.13

Tier 1 capital plus capital conservation buffer 0.12 0.05 0.07 <0.01 <0.01 0.08

Total capital plus capital conservation buffer 0.09 0.06 0.08 —- —- 0.08

Depository institutions

Estimated change in funding costs from 

raising median estimated amount of capital 

needed to meet Basel III minimum capital 

ratio for depository institutions with 

estimated capital ratio less than Basel III 

minimum

Less than $1 

billion in assets

$1 billion-10 

billion in 

assets

$10 billion50 billion 

in assets

$50 billion or 

more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies All

Common equity tier 1 capital plus capital 

conservation buffer

0.11 0.19 —- —- —- 0.11

Tier 1 capital plus capital conservation buffer 0.11 0.09 0.12 —- —- 0.12

Total capital plus capital conservation buffer 0.09 0.06 0.02 —- —- 0.09

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: We estimated the change in funding cost per dollar of assets associated with a 1 percentage 

point in the ratio of equity capital to assets by calculating the difference between return on equity and 

the after-tax interest rate on debt. We used the median return on equity (net income as a percentage

of equity capital) and the median interest rate on debt (interest expense as a percentage of interestbearing liabilities) for each group of bank holding companies and depository institutions for the first 

quarter of 2014. We assumed that the marginal corporate income tax rate equaled 35 percent. We 

found that funding costs increased by about 0.07-0.09 percentage points with a 1 percentage point 

increase in the ratio of capital to assets, or by about $0.07-0.09 per $100 of assets. For bank holding 

companies and depository institutions of different sizes and different status (as advanced approaches 

holding companies or subsidiaries of advanced approaches holding companies) and with capital 

ratios less than the Basel III minimums, we estimated the median change in funding cost associated 

with raising capital sufficient to meet Basel III minimums. We multiplied the median capital shortfall as

a percentage of assets by the estimated change in funding cost associated with a 1 percentage point 

increase in the capital ratio.

Our estimates of the increase in funding costs associated with raising 

capital are subject to several limitations. First, as discussed above, our 

estimates of the capital shortfall are subject to limitations and may either 

overstate or understate the amount of capital that bank holding 

companies and depository institutions raise in response to the Basel III 

requirements. Because the increase in funding costs is related to the size 

of the capital shortfall, our estimates of the increase in funding costs also 
 

Page 24 GAO-15-67 Bank Capital Reforms

may be either overstated or understated. In particular, some bank holding 

companies or depository institutions may maintain capital in excess of the 

minimum requirements (a capital buffer). The larger the capital buffer, the 

more funding costs would increase and the more our estimates would 

understate them. Our estimates also reflect the median amounts of 

capital required by bank holding companies and depository institutions we 

estimated would have insufficient capital to meet Basel III requirements 

and may not reflect the specific circumstances of an individual bank 

holding company or depository institution that may need to raise capital 

and may overstate or understate the change in its funding costs. 

Furthermore, our estimates reflect the median return on equity and 

interest rate on debt that prevailed in the first quarter of 2014, as well as 

our assumption of a corporate income tax rate of 35 percent. However, 

equity returns, debt interest rates, and tax rates may change, altering the 

relative prices of debt and equity and thus altering the change in funding 

costs associated with substituting equity for debt. Finally, our estimates 

assume that the return on equity will not change when a bank holding 

company or depository institution increases its capital ratio. However, 

increasing reliance on equity funding reduces the risks to investors, all 

else being equal. If a bank holding company or depository institution 

increased its ratio of capital to assets, then the return on its equity could 

fall as investors demanded less of a risk premium.

Although the U.S. Basel III capital requirements may have little impact on 

the capital level and structure of most banking organizations, their full 

impact remains uncertain. The capital regulations will be phased in over 

multiple years and Basel III is but one of a multitude of regulatory reforms 

affecting banking organizations. The higher regulatory capital ratios may 

increase the amount of capital banks hold (if they have to hold more 

capital than they otherwise would have held based on their assessment of 

economic risk), which could increase their funding costs. The increase in 

funding costs may result if holding higher capital meant that bank 

investors, were not willing to accept a lower return on equity. In addition, 

banking organizations will incur compliance costs, such as for additional 

staff training and expenses related to new systems or modification of 

existing systems for calculating regulatory capital ratios and for 

recordkeeping and reporting. For example, in the interim final rule, FDIC 

estimated that each bank with $175 million or less in total assets will incur 

$43,000 in direct compliance costs, which it concluded would represent a 
 

Page 25 GAO-15-67 Bank Capital Reforms

significant burden for about 37 percent of these banks.31 Of the advanced 

approaches banks, only one included any compliance cost information in 

its annual report, indicating it devoted thousands of staff hours to comply 

with Basel requirements.

We discuss below our review of empirical studies and our quantitative 

analysis the effects of Basel III requirements on the cost and availability 

of credit.

Some banks and others generally maintain that equity is more expensive 

than debt; thus, higher capital requirements will raise their funding costs. 

If this were the case, banks might charge higher prices for loans, 

depending on market competition (which could result in less borrowing); 

reduce certain lending; or exit certain lines of business if the return on 

capital was insufficient. In contrast, two non-empirical studies maintain 

that higher capital costs will not increase bank funding costs, because the 

increase in capital will make banks safer and cause investors to accept a 

lower return.32

We reviewed 11 studies—published from 2011 through 2014—that 

empirically examine the effects of higher capital requirements on banks 

(or lenders), including on cost of capital and the cost and availability of 

credit.33

 

31For purposes of the interim final rule, FDIC defined significant burden as an estimated 

cost greater than 2.5 percent of total non-interest expense or 5 percent of annual salaries 

and employee benefits.

To identify relevant empirical studies, we conducted searches of 

two databases, (ProQuest and EconLit) and identified and selected 

32Anat R. Admati, Peter M. DeMarzo, Martin F. Hellwig, and Paul C. Pfleiderer, “Fallacies, 

Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity Is 

Not Expensive,” Stanford University working paper 161 (Oct. 22, 2013) and Douglas J. 

Elliott, “The Practical Incentive Effects of Different Approaches to Capital Requirements.” 

Brookings Institution paper (Nov. 15, 2013). 

33See the bibliography for the empirical studies we reviewed that focused on the cost and 

availability of credit in terms of three outcomes—the cost of capital to banks, the interest 

rate paid by borrowers, and the quantity of loans originated by banks. 

Empirical Research 

Indicates U.S. Basel III 

Capital Requirements Are 

Expected to Have a 

Modest Effect on the Cost 

and Availability of Credit

Empirical Studies We 

Reviewed Indicate Higher 

Regulatory Capital 

Requirements Negatively 

Affect the Cost and Availability 

of Credit
 

Page 26 GAO-15-67 Bank Capital Reforms

economic studies from peer-reviewed journals and working papers from 

governmental institutions that were published from 2011 through 2014. 

We used search terms for selecting the studies, such as interest rate 

spread, credit availability, cost of capital, and partial equilibrium. The 

results of the studies generally indicate that higher capital ratios—both 

tier 1 capital and common equity tier 1 capital ratios—in the United States 

will result in a modest increase in the cost of capital for banks and loan 

rates for borrowers and a modest decrease in the quantity of loans for 

banks. However, the studies also noted that capital requirements are one 

of several policies that can affect the cost and availability of credit. Some 

of the studies analyze the effect of capital requirements in other countries, 

which helps put the estimated effect of Basel III in the United States into a 

broader perspective.

Bank funding cost. Two studies examining the effect of higher capital 

requirements on the capital costs of banks generally found that raising 

capital requirements will increase the capital costs of banks.34 One of the 

studies estimated that increasing the common equity tier 1 capital ratio by 

1.3 percentage point would increase the cost of capital for large banks in 

the United States by 0.13 percentage point.35 The study covered eight 

countries, and the estimates ranged from 0.00 percentage points 

(Canada) to 0.26 percentage points (Japan).36 The other study estimated 

that a 10 percentage point increase in the tier 1 ratio would increase the 

cost of capital in the United States between 0.60 and 0.90 percentage 

points.37

 

34Malcolm Baker and Jeffery Wurgler, “Do Strict Capital Requirements Raise the Cost of 

Capital? Banking Regulation and the Low Risk Anomaly,” National Bureau of Economic 

Research working paper (May 2013) 24, 26-27 and Thomas F. Cosimano and Dalia S. 

Hakura, “Bank Behavior in Responses to Basel II: A Cross-Country Analysis” International 

Monetary Fund working paper (May 2011), 30. 

These results generally are consistent with our analysis, in which 

we estimated that the increase in funding cost associated with a 1 

percentage point increase in the ratio of capital to assets was from about 

0.07 to 0.09 percentage points as of the first quarter of 2014 (see app. II).

35Cosimano and Hakura, 31. 

36The eight countries are Canada, Denmark, Germany, Ireland, Japan, Sweden, United 

Kingdom, and the United States. The overall estimate for all eight countries was 0.12 

percentage points. 

37Baker and Wurgler, 26.
 

Page 27 GAO-15-67 Bank Capital Reforms

Cost of borrowing. Nine studies examining the effect of higher capital 

requirements on loan rates had results ranging from no effect to an 

increase in loan rates.38 The studies generated estimates of the effect of 

higher capital requirements on borrower costs, with some covering 

multiple countries in North and South America, Europe, or Asia. 39 Two 

studies covering the United States estimated that a 1 percentage point 

increase in capital requirements would increase bank lending rates by a 

0.12 percentage point and 0.21 percentage point, respectively.40 The 

other two studies that covered the United States estimated that a 1.3 and 

2.0 percentage point increase in capital requirements would increase 

bank lending rates by a 0.17 percentage point and 0.51 percentage point, 

respectively.41 In comparison, the studies covering other countries 

estimated that a 1 percentage point increase in capital requirements 

would increase bank lending rates around 0.04 to 0.25 percentage points 

(and a 1.3 percentage point increase would increase bank lending rates 

from 0.0 to 0.34 percentage points).42

 

38Baker and Wurgler, 26; and Cosimano and Hakura, 30. Also see Dean Corbae and 

Pablo D’Erasmo, “Capital Requirements in a Quantitative Model of Banking Industry 

Dynamics,” Federal Reserve Bank of Philadelphia working paper 14-13 (April 2014), 44; 

Alfredo, Martın-Oliver, Sonia Ruano, and Vicente Salas-Fumas, “Banks’ Equity Capital 

Frictions, Capital Ratios, and Interest Rates: Evidence from Spanish Banks,” International 

Journal of Central Banking, vol. 9, no. 1 (March 2013), 213-214; Matthieu Darracq Paries, 

Christoffer Kok Sørensen, and Diego Rodriguez-Palenzuela, “Macroeconomic 

Propagation under Different Regulatory Regimes: Evidence from an Estimated DSGE 

Model for the Euro Area,” International Journal of Central Banking, vol. 7, no. 4 

(December 2011), 81; Scott Roger and Francis Vitek, “The Global Macroeconomic Costs 

of Raising Bank Capital Adequacy Requirements,” International Monetary Fund working 

paper 12-44 (February 2012), 7; Patrick Slovik and Boris Cournède, “Macroeconomic 

Impact of Basel III,” Organisation for Economic Co-operation and Development, 

Economics Department working paper 844 (Feb. 14, 2011), 8; Barbara Šutorova and Petr 

Teply, “The Impact of Basel III on Lending Rates of EU Banks,” Czech Journal of 

Economics and Finance, vol. 63, no. 3 (2013), 239; and Meilan Yan, Maximilian J.B. Hall, 

and Paul Turner, “A Cost-Benefit Analysis of Basel III: Some Evidence from the UK,” 

International Review of Financial Analysis, vol. 25 (December 2012), 79. All the studies 

above produce quantitative estimates, but one study also reports an increase in the costs 

to the borrower without reporting a quantitative estimate—see Paries, Sørensen, and 

Rodriguez-Palenzuela.

39Estimates on lending rates include interest rates and interest rate spreads.

40Roger and Vitek, 7, and Slovik and Cournede, 8. 

41Cosimano and Hakura, 30, and Corbae and D’Erasmo, 44. 

42Countries with the lowest estimates include Canada and several European nations. 

Asian countries such as Japan, Korea, and Australia had estimates that tend to be higher. 
 

Page 28 GAO-15-67 Bank Capital Reforms

Quantity of loans. Four of the studies examining the effect of higher 

regulatory capital requirements on the availability of credit found that 

higher requirements would reduce the quantity of loans supplied, but the 

estimated effect varied across the studies.43 As bank lending rates 

increase, some of the studies generally expect the demand for loans to 

be less, thereby reducing the quantity of loans made by banks. Two of the 

studies covered the United States and estimated that a 1.3 percentage 

point increase in common equity tier 1 capital or 2.0 percentage point 

increase in tier 1 capital ratio—will decrease the quantity of loans by 2.97 

percent and 8.71 percent, respectively.44 In comparison, one of the 

studies also covered countries in Asia, Europe, and North America and 

estimated that a 1.3 percentage point increase in regulatory capital 

requirements will decrease the quantity of loans in these countries, but 

the estimates vary across countries—ranging from a 0.16 percent decline 

to a 32.61 percent decline.45

Like the studies we reviewed, our analysis suggests that raising capital to 

cover the capital shortfall would have a modest effect on the cost and 

availability of credit in both the short and the long run. As discussed 

previously, the total amount of capital that bank holding companies and 

depository institutions would need to raise to cover the capital shortfall 

and meet the new minimum capital ratios would be small relative to total 

assets, likely less than 1 percent. In addition, most bank holding 

companies and depository institutions do not appear to need to raise 

capital to meet minimum requirements. For those that do, the amount of 

capital they need to raise appears to be small relative to total assets in 

some cases but could be large in others. To assess the short-run impact 

on the cost and availability of credit for bank holding companies or 

depository institutions raising capital to meet minimum requirements, we 

used (1) estimates of changes in loan volumes and loan spreads 

associated with changes in capital from our prior work and (2) our 

 

43Celine, Gauthier, Alfred Lehar, and Moez Souissi. “Macroprudential Capital 

Requirements and Systemic Risk” Journal of Financial Intermediation, vol. 21, no. 4 

(October 2012). Corbae and D’Erasmo; Cosimano and Hakura; and Paries, Sørensen, 

and Rodriguez-Palenzuela. One study did not produce an empirical estimate, but 

constructs a quantitative model that suggests that the quantity of loans would decrease 

(Paries, Sørensen, and Rodriguez-Palenzuela). 

44Cosimano and Hakura, 30 and Corbae and D’Erasmo, 44. 

45Cosimano and Hakura, 30. 

Raising the Amount of the 

Capital Shortfall under U.S. 

Basel III Regulations Likely 

Would Have a Modest Effect 

on the Cost and Availability of 

Credit
 

Page 29 GAO-15-67 Bank Capital Reforms

estimates of the capital shortfall described above.46 To assess the longrun impact, we used an existing loan pricing model.47

The short-run impact of meeting the new capital requirements on the cost 

and availability of credit likely would be small. In prior work, we estimated 

that a 1 percentage point increase in the ratio of capital to assets is 

associated with a short-run increase in loan spreads of about 0.16 

percentage points and a short-run decline in loan volume growth of about 

1.2 percentage points. Our analysis of the capital shortfall suggests that 

bank holding companies would need to increase total capital by about 

0.03 percent of total assets to meet the new minimum total capital ratio 

plus the capital conservation buffer. If bank holding companies raised the 

capital to cover the shortfall in a single quarter, these estimates suggest 

that covering the capital shortfall would lead to an increase in loan 

spreads of less than 0.01 percentage points and a decline in loan volume

growth of less than 1 percentage point.

Our estimates also suggest that the long-run impact of meeting the new 

capital requirements on the cost and availability of credit also likely would 

be small. To assess the potential impact on loan rates, we used an

existing loan pricing model that captures key determinants of loan rates in 

the long run, including funding costs, credit spreads, and administrative 

costs. As discussed above, funding costs for bank holding companies and 

depository institutions that increase equity capital to meet Basel III 

minimum capital ratios could increase. Bank holding companies and 

depository institutions can respond to changes in their funding costs in 

several ways, including raising loan rates, shifting lending activity to 

 

46In our prior work we designed and used an econometric model to estimate the effect of a 

change in capital levels on key credit market variables. The model is a version of existing 

vector autoregression models found in the macroeconomic and monetary literature 

extended to include a banking sector. The econometric approach has specific limitations 

but is considered a reasonable alternative to other types of models, including more 

sophisticated models. Our model includes four variables that capture supply, demand, 

output, and prices that comprise the “macroeconomy.” We extend the model to include the 

using of various proxies for loan volumes, bank capital, loan spreads, and information on 

lending standards to capture the banking sector. See GAO, Dodd-Frank Act: Hybrid 

Capital Instruments and Small Institution Access to Capital, GAO-12-237 (Washington, 

D.C.: Jan. 18, 2012). 

47The loan pricing model we used is described in Douglas Elliott, A Primer on Bank 

Capital (Washington, D.C.: The Brookings Institution, January 2010). We used a modified 

version of this model in prior work; see GAO-12-237. For information on the loan pricing 

model, see appendix II. 
 

Page 30 GAO-15-67 Bank Capital Reforms

lower-risk borrowers, and increasing efficiency. If bank holding companies 

and depository institutions that have to raise capital covered their 

increased funding costs solely by increasing their lending rates, our 

estimates of the funding cost changes are indicative of the amounts by 

which lending rates at these institutions would increase—generally less 

than 0.3 percentage points. However, some factors may cause lending 

rates to increase by less than this amount. The extent to which bank 

holding companies and depository institutions can raise lending rates is 

limited by the amount of competition they face from other lenders—

including lenders that already hold sufficient capital—as well as other 

factors. Thus, bank holding companies and depository institutions that 

need to raise capital may cover their increased funding costs by other 

means in addition to, or instead of, raising lending rates. For example, 

they could increase lending to lower risk borrowers and reduce lending to 

higher risk borrowers in order to reduce credit spreads, or they could 

reduce salaries or employ fewer people to lower administrative costs. In 

this case, lending rates would increase by less than the amount that 

funding costs increase.

Our estimates of the impact of meeting the new capital requirements on 

the cost and availability of credit are subject to limitations and should be 

interpreted with caution. As discussed, our estimates of capital shortfall 

and the increase in funding costs associated with raising capital to 

eliminate the shortfall are subject to important limitations that could lead 

us to overstate or understate them. Because the change in lending rates 

is related to both the capital shortfall and the associated increase in 

funding costs, it too may be overstated or understated. For example, if 

bank holding companies or depository institutions maintain a capital 

buffer in excess of the minimum amount of capital required, then the 

increase in lending rates likely will be greater than our estimates of the 

increase. In addition, past macroeconomic and credit market conditions 

heavily influence the methodology we used to estimate the short-run 

response of loan spreads and loan volume growth to changes in the ratio 

of capital to assets, so the estimates may not apply to future periods if 

macroeconomic and credit market conditions were significantly different. 

Furthermore, the model we used to estimate the long-run response of 

loan rates to changes in the ratio of capital to assets may not reflect all of 

the determinants of loan rates.
 

Page 31 GAO-15-67 Bank Capital Reforms

Although their views are not indicative of the banking industry as a whole, 

bank officials we interviewed generally expected that they would be able 

to meet new capital requirements, their compliance costs would increase, 

and effects of the requirements on credit would not be large. According to 

officials from all eight community banks we interviewed, they did not 

anticipate any difficulties in meeting the U.S. Basel III capital 

requirements but expect to incur additional compliance costs. Because 

we interviewed a relatively small number of community banks, compared 

with the overall population of banks with assets of less than $10 billion, 

we cannot generalize the responses. All the officials said their banks were 

well capitalized in excess of Basel III capital ratio requirements and they 

did not anticipate having to raise any additional capital or take additional 

actions to meet the heightened capital requirements. At the same time, 

the community bank officials generally told us that they have been 

incurring additional compliance costs because of the new requirements, 

but none could quantify the costs. For example, five officials said that they 

will need to update their information technology systems or purchase 

software to comply with enhanced reporting and recordkeeping 

requirements. Two told us that they consulted (or expect to consult) with 

accountants, attorneys, or both to understand the Basel III capital 

requirements and the implications for their banks. Additionally, six told us 

that their staffs have been devoting more of their time to comply with the 

new capital requirements, but none said they have hired or planned to 

hire additional staff. Finally, four officials told us that several revisions the 

federal banking regulators made to the regulations—particularly those 

involving the risk weights for residential mortgages, accumulated other 

comprehensive income, and trust preferred securities—helped to 

minimize their regulatory burden. Similarly, officials from an industry 

association told us that community banks fared well under the capital 

regulations, which addressed most of the concerns raised by the 

association about the proposed regulations.

Consistent with the findings from our review of the literature and analysis 

of the capital shortfall, the officials from some community banks told us 

that they generally expected the U.S. Basel III capital requirements to 

have a limited effect on the cost and availability of credit. Specifically, four 

said they did not expect the new requirements to hamper their ability to 

lend to their customers. However, several said that the higher capital 

requirements for high-volatility commercial real estate might reduce their 

lending in this area. Three officials told us that they expect tighter 

underwriting standards to make it more difficult and expensive for 

marginal customers to borrow, but five expected loan prices to increase. 

Some Market Participants 

Generally Expect U.S. 

Capital Requirements to 

Increase Compliance 

Costs but Have a Limited 

Effect on the Cost and 

Availability of Credit
 

Page 32 GAO-15-67 Bank Capital Reforms

Officials from two banks mentioned that competition from other 

institutions, such as credit unions, could affect loan pricing.

Officials from the 10 U.S. and foreign G-SIBs (large, internationally active 

banks) that we interviewed told us that the U.S. Basel III’s minimum 

capital requirements generally tended not to act as binding capital 

constraints on them. Instead, three of the banks told us that U.S. G-SIBs 

are subject to stress-testing under Comprehensive Capital Analysis and 

Review (CCAR) by the Federal Reserve, and the capital requirements 

under CCAR typically are higher than the minimum Basel III 

requirements.48

The officials from all the U.S. G-SIBs we interviewed said that they have 

expended significant resources in terms of staff and money to implement 

and comply with the U.S. Basel III capital requirements. For example, 

they said that they have had to hire additional staff and develop new 

technology and infrastructure to comply with the regulations. Three told 

us that under the Collins Amendment they have had to calculate a total of 

six capital ratios—three using the advanced approaches and three using 

the standardized approach—which is significantly burdensome. But none 

of the U.S. G-SIBs could provide us with a precise estimate of their 

compliance costs, in part because Basel III implementation has been 

done in conjunction with other regulatory reforms, such as the DoddFrank Act, and in part because staffs from many departments were 

involved in implementation. However, several officials told us the costs 

have been running into the millions of dollars and included significant staff 

hours.

To be able to pay dividends to shareholders, the G-SIBs 

must meet the capital requirements set under CCAR. In addition, officials 

from four U.S. G-SIBs said that the supplementary leverage ratio would 

be more onerous or costly with which to comply than the risk-based 

capital requirements.

According to officials from the 10 G-SIBs, the Basel III capital 

requirements are expected to have a mixed effect on their lending and 

lines of business. Four of the G-SIBs generally told us they expected the 

high-capital requirements to affect lending—namely by reducing the 

availability of credit or increasing costs for borrowers (or both). More 

 

48The Federal Reserve’s program, Comprehensive Capital Analysis and Review, 

implements its capital plan rule. 
 

Page 33 GAO-15-67 Bank Capital Reforms

specifically, two G-SIBs said the capital requirements will have some 

effect on the mortgage market, but one also noted that other factors may 

have a greater effect on the market (because it is a highly competitive 

market). Two officials told us that the U.S. Basel III regulations may cause 

mortgage servicing assets to move from the banking sector to the nonbanking sector.49

Officials from a number of the community banks and G-SIBs told us that 

they expect the U.S. Basel III capital regulation to improve the resiliency 

of the U.S. banking system. Specifically, officials from two community 

banks said that they expected the capital regulations to improve the 

safety and soundness of the banking system, but three community banks 

questioned the appropriateness of the regulations for small banks. 

Officials from nine of the G-SIBs said the regulations generally would 

make the U.S. banking system safer, because higher capital and liquidity 

reduce risks to the banking system. At the same time, some said that the 

capital regulation could create other vulnerabilities that made the financial 

system less stable—for example, by shifting the risk outside of regulated 

banks or by reducing the willingness of banks to hold risky assets during 

times of market stress.

In particular, one said that 25 percent of all U.S. 

mortgage servicing rights assets have moved outside of the banking 

sector because of the new regulatory capital requirements. In addition, 

the G-SIBs said that they generally expected the new leverage and 

liquidity requirements, along with the capital requirements, to reduce 

certain of their business activities, particularly their derivatives and shortterm securities financing transactions.

Differences in regulatory capital requirements across jurisdictions could 

affect competition between internationally active banks. For example, 

higher capital costs driven by higher regulatory capital requirements could 

result in a competitive disadvantage for banks that compete for similar 

customers with banks subject to lower capital requirements. As have the 

previous Basel accords, Basel III serves, in part, to limit competitive 

advantages or disadvantages due to such differences. For example, one 

of the two fundamental objectives of the initial Basel accord was that 

standards should be fair and applied with a high degree of consistency to 

 

49Mortgage servicing asset is the right of a bank to service a mortgage loan or a portfolio 

of loans for another bank’s account. The cost associated with acquiring these rights may 

be capitalized under certain circumstances.

The Basel Committee 

Is Taking Steps to 

Identify Basel III 

Implementation 

Inconsistencies
 

Page 34 GAO-15-67 Bank Capital Reforms

banks in different countries with a view to diminishing an existing source 

of competitive inequality among international banks. As specified in its 

charter, the Basel Committee’s activities include monitoring the 

implementation of Basel standards in member countries to help ensure 

their timely, consistent, and effective implementation and contribute to a 

level playing field among internationally active banks. At the same time, 

there are limitations to full harmonization. As was the case with the 

implementation of Basel II, some market participants or observers have 

raised concerns about regulatory differences in the implementation of 

Basel III between jurisdictions and their possible competitive effects.

According to the Basel Committee’s October 2014 progress report, 25 of 

its 28 members reported having regulations in effect to implement Basel 

III’s higher capital requirements (see table 7).50 However, three Basel 

Committee members reported they had not yet implemented all the Basel 

III capital requirements, namely the conservation and countercyclical 

buffers. In September 2014, U.S. regulators finalized their liquidity 

coverage ratio regulation, but it will not take effect until January 2015. In 

addition to the risk-based capital standards, the Basel Committee 

monitors implementation of the additional loss absorbency requirements 

for G-SIBs and domestic systemically important banks, liquidity coverage 

ratio, and leverage ratio.51 Basel Committee members generally reported 

that they have not yet adopted regulations to implement these 

requirements.

 

50The progress report is based on data self-reported by individual jurisdictions and is not 

subject to verification by the Basel Committee. Basel Committee on Banking Supervision, 

Seventh progress report on adoption of the Basel regulatory framework (Basel, 

Switzerland: October 2014). 

51In the United States, the Basel III leverage ratio is referred to as the supplementary 

leverage ratio. 

Most Member Jurisdictions 

Have Implemented Basel 

III Capital Requirements, 

but Committee 

Assessments Found 

Some Inconsistencies
 

Page 35 GAO-15-67 Bank Capital Reforms

Table 7: Implementation Status of the Basel III Capital Framework as Reported by Members of the Basel Committee, as of 

October 2014

Jurisdiction Risk-based capital

G-SIBs and

Domestic Systemically 

Important Banks

Liquidity

coverage ratio Leverage ratio

Argentina Completed In progress In progress In progress

Australia Completed In progress Completed In progress

Brazil Completed Not started In progress In progress

Canada Completed In progress In progress In progress

China Completed In progress Completed In progress

Hong Kong Special 

Administrative Region

Completed In progress In progress Not started

India Completed In progress In progress In progress

Indonesia Completed In progress In progress In progress

Japan In progress In progress In progress Not started

Korea Completed In progress In progress Not started

Mexico In progress Not started Not started Not started

Russia In progress Completed In progress In progress

Saudi Arabia Completed In progress Completed In progress

Singapore Completed In progress In progress In progress

South Africa Completed In progress In progress In progress

Switzerland Completed Completed In progress In progress

Turkey Completed Not started In progress In progress

United States Completed Not started In progress Completed

European Union Completed a In progress b In progress In progress

Belgium Completed In progress In progress In progress

France Completed In progress In progress In progress

Germany Completed In progress In progress In progress

Italy Completed In progress In progress In progress

Luxembourg Completed In progress In progress In progress

Netherlands Completed In progress In progress In progress

Spain Completed In progress In progress In progress

Sweden Completed In progress In progress In progress

United Kingdom In progress In progress In progress In progress

Source: Basel Committee on Banking Supervision. | GAO-15-67

Notes: “Not started” means that no draft law, regulation or other official document has been made 

public to detail the planned content of the domestic regulatory rules. “In process” means that a draft 

law, regulation, or other official document is already publicly available or that the domestic legal or 

regulatory framework has been finalized and approved but still is not applicable to banks. 

“Completed” means that the domestic legal and regulatory framework already applies to banks.

a

The European Commission is an observer on the Basel Committee.
 

Page 36 GAO-15-67 Bank Capital Reforms

b

The European Union adopted the Capital Requirements Regulation and Directive IV to implement 

Basel III. The Capital Requirements Regulation includes Basel III’s capital, leverage, and liquidity 

requirements; is binding on all European Union member states; and does not need to be transposed 

by European Union member states into national law. The Capital Requirements Directive includes 

Basel III’s capital conservation and countercyclical buffers and has to be transposed by European 

Union member states into national law.

The Basel Committee’s assessments of Basel III implementation found 

that the jurisdictions reviewed to date have adopted rules generally 

consistent with the Basel III standards but identified some inconsistencies 

in regulator-approved bank models across countries.52 According to the 

Basel Committee, public confidence in prudential ratios, resiliency of 

banks, and a level regulatory playing field for internationally active banks 

cannot be achieved without consistency in the adoption and 

implementation of the Basel standards. Recognizing the importance of 

Basel III’s implementation, the Basel Committee established its 

Regulatory Consistency Assessment Program (RCAP) in 2012.53

The Basel Committee has completed seven jurisdictional assessments 

and generally found the jurisdictions compliant; additionally, the 

committee reviewed European Union (EU) and U.S. draft regulations but 

did not assign an overall compliance grade, because the rules still were in 

draft form at the time of the review. Jurisdictional assessments review the 

extent to which national Basel III regulations in each member jurisdiction 

align with the Basel III minimum requirements. They examine the 

consistency and completeness of the adopted standards, including the 

prudential significance of any deviations in the standards. According to 

the Basel Committee, the assessments help highlight the current and 

potential impact of any gaps in the regulatory regime, and help member 

jurisdictions undertake reforms needed to strengthen their regulatory 

regimes. Each member jurisdiction has agreed to undergo an RCAP 

assessment, and the Basel Committee has given priority to jurisdictions in 

RCAP 

assessments are designed as peer reviews undertaken by technical

experts from member jurisdictions and are done on a jurisdictional and 

thematic basis.

 

52Regulator-approved bank models are internal models that banks use to determine riskweighting of assets.

53RCAP assessments of capital regulations cover Basel II, 2.5, and III. The International 

Monetary Fund also monitors and assesses the stability of the financial system through its 

Financial Sector Assessment Program. These assessments also assess country 

compliance with the Basel Committee’s core principles for effective banking supervision, 

and are viewed by the Basel Committee as complementary to its RCAP work.

Jurisdictional RCAP 

Assessment
 

Page 37 GAO-15-67 Bank Capital Reforms

which G-SIBs are domiciled.54

The Basel Committee has completed jurisdictional assessments of the 

final Basel III regulations adopted by Australia, Brazil, Canada, China, 

Japan, Singapore, and Switzerland and generally found them to be

“compliant.” Each RCAP uses four grades (compliant, largely compliant, 

materially noncompliant, and noncompliant) to provide an overall 

assessment of the compliance of the member jurisdiction’s regulations 

with Basel III.

Currently, RCAP assessments focus on 

the Basel III risk-based capital standards, but will be expanded to cover 

the Basel standards relating to liquidity, leverage, and systemically 

important banks.

55 RCAPs also assess and grade a jurisdiction’s regulations 

for compliance with 20 key components of the Basel III standards: for 

example, standardized approach and advanced approaches for credit and 

market risk, capital buffers, supervisory review process, and 

disclosures.56

 

54Jurisdictional RCAPs are completed using a 15-step general process within three 

general phases, and the Basel Committee has a goal of completing RCAPs within 6 

months of beginning the process. For more information, see Basel Committee on Banking 

Supervision, Basel III Regulatory Consistency Assessment Programme (RCAP) (Basel, 

Switzerland: October 2013).

In their RCAPs, each of the seven jurisdictions received 

one or more largely compliant grades for their compliance with a specific 

key component, but none received a grade below largely compliant. In 

addition, the China and Switzerland RCAPs identified examples in which 

the two jurisdictions adopted regulations more stringent than the Basel III 

55A domestic regulatory framework is considered compliant with Basel III if all minimum 

provisions of the relevant Basel standard have been satisfied and no material differences 

are identified that would give rise to prudential concerns or provide a competitive 

advantage to internationally active banks. A domestic regulatory framework is considered 

largely compliant with Basel III if only minor provisions of the relevant Basel standards 

have not been satisfied and if differences that have only a limited impact on financial 

stability or the international-level playing field have been identified. A domestic regulatory 

framework is considered materially non-compliant with Basel III if key provisions of 

relevant Basel standards have not been satisfied or if differences that could materially 

affect financial stability or the international level playing field have been identified. A 

domestic regulatory framework is considered noncompliant with Basel III if the relevant 

Basel standards have not been adopted or if differences that could severely affect 

financial stability or the international playing field have been identified.

56Assessment grades and overall grades are separate but completed in a similar manner. 

Assessment grades are assigned using a three-step approach according to the materiality 

of identified deviations. The materiality of quantifiable gaps is measured in terms of the 

current and potential impact on risk-based capital ratios and risk-weighted assets.
 

Page 38 GAO-15-67 Bank Capital Reforms

minimum standards.57

The Basel Committee also conducted jurisdictional RCAP assessments of 

proposed Basel III rules for the European Union and the United States, 

but did not assign them an overall assessment grade because of the draft 

nature of the rules.

For example, China and Switzerland adopted 

certain regulatory capital requirements that are more stringent than the 

minimums set in Basel III. According to the Basel Committee, the RCAPs 

identified no areas to be consistently above the Basel minimums, 

suggesting the Basel capital standards generally are not calibrated too 

low in the collective judgment of the implementing authorities.

58

 

57See Basel Committee on Banking Supervision, Regulatory Consistency Assessment 

Programme (RCAP): Assessment of Basel III regulations - China (Basel, Switzerland:

September 2013); and Basel Committee on Banking Supervision, Regulatory Consistency 

Assessment Programme (RCAP): Assessment of Basel III regulations - Switzerland 

(Basel, Switzerland, June 2013).

The RCAP assessments found both proposed 

approaches generally complied with the vast majority of Basel III’s key 

components. However, the assessments also found certain components 

of the proposals to be materially noncompliant. Specifically, the EU RCAP 

noted that the proposed approach fell substantially short of the Basel 

framework in the definition of capital and the internal ratings-based 

approach for credit risk. The U.S. RCAP noted that the grade was mainly 

due to the proposed implementation of an alternative approach to replace 

Basel use of external credit ratings. The European Commission 

expressed concerns about RCAP’s preliminary findings—including that 

the assessment did not take into account that the EU is a single 

jurisdiction that applies Basel III to all its banks and investment firms, 

which necessitates that national regulators employ a certain level of 

proportionality in applying the rules. U.S. agencies noted that the DoddFrank Act prohibits the use of credit ratings for setting capital charges for 

securitization exposures, resulting in a deviation from the Basel III 

standards. They also noted that their evidence suggests that the 

deviation’s impact will not be material and therefore believe that their 

approach is largely compliant rather than materially non-compliant. The 

United States and EU are currently undergoing RCAP assessments 

based on their final Basel IIII regulations.

58See Basel Committee on Banking Supervision, Basel III Regulatory Consistency 

Assessment (Level 2), preliminary report - European Union (Basel, Switzerland: October 

2012); and Basel Committee on Banking Supervision, Basel III Regulatory Consistency 

Assessment (Level 2), preliminary report - United States of America (Basel, Switzerland: 

October 2012).
 

Page 39 GAO-15-67 Bank Capital Reforms

In a September 2013 speech, the Basel Committee’s Secretary General 

acknowledged the limitations of RCAP assessments, recognizing that the 

committee has no enforcement power beyond the power of peer pressure 

and public disclosure.59

The Basel Committee conducted three thematic RCAP assessments and 

found considerable variation across banks in the average risk-weighted 

assets for market risk in the trading book and credit risk in the banking 

book.

However, the Secretary General noted that 

RCAPs are a strong demonstration of the Basel Committee’s commitment 

to international consistency and, where this cannot be perfectly achieved, 

to greater transparency. The Secretary General further noted that if an 

individual jurisdiction departed from Basel III standards, the nature and 

materiality of that divergence ought to be well understood. If a bank did 

not operate under regulations consistent with Basel standards, any 

difference should be much more transparent when it reported a “Basel 

ratio.” According to the Secretary General, in that way markets can have 

something of a policing role, offsetting regulatory differences in their 

assessment of banks’ financial ratios.

60

 

59Wayne Byres, Secretary General, Basel Committee on Banking Supervision, “Global 

Consistency in Financial Regulation: Is the glass half full, half empty, or just more 

transparent?” speech to the RiskMinds Risk and Regulation Forum, Nice, France (Sept. 

10, 2013).

Thematic assessments review regulatory outcomes to ensure that 

the regulatory capital ratios calculated by banks are consistent across 

banks and jurisdictions and predominantly reflect differences in risk rather 

than in bank and supervisory practices. The Basel Committee initially 

focused its thematic assessments on analyzing how banks were riskweighting their assets, because differences in the application of the Basel 

60Basel Committee on Banking Supervision, Regulatory Consistency Assessment 

Programme (RCAP): Analysis of risk-weighted Assets for Credit Risk in the Banking Book 

(Basel, Switzerland: July 2013), Regulatory Consistency Assessment Programme 

(RCAP): Second report on risk-weighted assets for market risk in the trading book (Basel, 

Switzerland: December 2013); and Regulatory Consistency Assessment Programme 

(RCAP): Analysis of Risk-weighted Assets for Market Risk (Basel, Switzerland: January 

2013; revised February 2013). The trading book refers to securities that a bank would not 

hold to maturity and for which it accounts at current market value. The banking book refers 

to securities a bank plans to hold to maturity at their original book value. If the bank 

decides to sell the securities, it then moves the securities to the trading book, where they 

are given fair market value accounting treatment. Average risk-weighted assets include, 

for example, the three wholesale assets classes covered by the hypothetical portfolio 

exercise (sovereign, bank, and corporate) that account on average for about 40 percent of 

participating banks’ total credit risk-weighted assets. 

Thematic RCAP Assessments
 

Page 40 GAO-15-67 Bank Capital Reforms

standards can lead to variations in the amount of capital banks have to 

hold. In that regard, the objective of the assessments generally has been 

to obtain a preliminary estimate of the potential for variation in riskweighted assets across banks and highlight aspects of the Basel 

standards that contribute to this variation.

More specifically, the RCAP examining risk-weighted assets in the 

banking book found that most of the variation in calculation of riskweighted assets could be explained by broad differences in the risk 

composition of banks’ assets, reflecting differences in risk preferences as 

intended under the Basel III framework. But the RCAP also found 

differences in bank and supervisory practices drove a material amount of 

the variation.61 Similarly, the RCAPs examining risk-weighted assets in 

the trading book found considerable variation in the calculation of riskweighted assets for market risk across banks.62

 

61The RCAP examining credit risk in the banking book found that some outlier banks use 

different risk-weighting that could cause variation of as much as 2 percentage points from 

the benchmark portfolio (or 20 percent in relative terms) in either direction. More than 100 

major banks participated in the RCAP analysis. Non-G-SIBs were included when the host 

countries of those banks did not have any G-SIBs, and the significance of the bank’s 

trading activity relative to their domestic peers.

Supervisory decisions 

applied to all banks in a jurisdiction or to individual banks were deemed to 

be a sizeable driver of the variation, but the variation also was due to the 

choice of models banks used to calculate regulatory capital. According to 

the Basel Committee Chairman, national supervisors and banks have 

been using the assessments to take action where needed. Moreover, in 

February 2014, the Financial Stability Board reported that by the 

November 2014 G20 summit, the Basel Committee will prepare a plan to 

address excessive variability in risk-weighted asset calculations that can 

62The thematic RCAPs analyzing market risk were divided into two phases. Phase 1 

employed a hypothetical test portfolio exercise (in which groups of banks were given a 

hypothetical portfolio consisting primarily of simple long and short positions and asked to 

assign risk-weights using their internal models) and found a substantial difference 

between the bank reporting the lowest risk-weights and the bank reporting the highest. 

Phase 2 found similar results with another hypothetical test portfolio exercise, which 

expanded the analysis to cover additional types of portfolios of assets a bank might hold. 

Fifteen banks participated in Phase 1, most of which were G-SIBs. Non-G-SIBs were 

included if the host countries of those banks did not have any G-SIBs and the significance 

of the bank’s trading activity relative to their domestic peers. Seventeen banks (primarily 

G-SIBs) participated in Phase 2, and several non-G-SIBs were included as necessary.
 

Page 41 GAO-15-67 Bank Capital Reforms

be implemented to improve consistency and comparability in bank capital 

ratios.

63

U.S. Basel III capital regulations generally apply to both U.S. banking 

organizations and their foreign banking counterparts operating in the 

United States, helping to provide a level regulatory playing field in the 

U.S. market. In general, U.S. regulation of foreign banks is guided by the 

principle of national treatment and equality of competitive opportunity, 

which generally means that foreign banking entities operating in the 

United States should be treated no less favorably than similarly situated 

U.S. banking organizations and should generally be subject to the same 

restrictions and obligations in the United States as those that apply to the 

domestic operations of U.S. banking organizations.64

Foreign banking organizations (such as foreign parent banks) have 

structured their U.S. banking operations in a number of ways.65

 

63Mark Carney, Chairman, Financial Stability Board, “Financial Reforms–Progress and 

Challenges,” letter of February 17, 2014, to the G20 Finance Ministers and Central Bank 

Governors.

For 

example, some conduct U.S. banking activities directly through branches 

or agencies, while others own U.S. banks directly. Most foreign banking 

organizations operate through branches and agencies, because as 

64Several laws enacted since 1978 have shaped the regulation of foreign-owned 

intermediate holding companies and other foreign-owned banking operations. The 

International Banking Act of 1978 (Pub. L. No. 95-369, 92 Stat. 607 (1978)) is the primary 

federal statute regulating foreign bank operations in the United States. In passing the act, 

Congress adopted a policy of “national treatment,” the goal of which is to allow foreign 

banks to operate in the United States without incurring either significant advantage or 

disadvantage compared with U.S. banks. For additional information, see GAO, Bank 

Capital Requirements: Potential Effects of New Changes on Foreign Holding Companies 

and U.S. Banks Abroad, GAO-12-235 (Washington, D.C.: Jan. 17, 2012). In March 2014, 

the Federal Reserve issued a final rule requiring certain foreign banking organizations to 

set up a U.S. intermediate holding company to act as a top tier U.S. company for the 

foreign banking organization’s subsidiaries in the United States. The requirement will be 

generally effective in July 2016.

65A foreign banking organization is a foreign bank that operates a branch, agency, or 

commercial lending company subsidiary in the United States, or controls a bank in the 

United States or controlled an Edge corporation acquired after March 5, 1987, and any 

company of which the foreign bank is a subsidiary, provided that if the top-tier foreign 

banking organization is incorporated in or organized under the laws of any State, the 

foreign banking organization shall not be treated as a foreign banking organization for 

enhanced prudential standards purposes. 

U.S. Basel III Capital 

Rules Generally Apply to 

U.S. and Foreign Banking 

Entities and Help Provide 

a Level Regulatory Playing 

Field in the U.S. Market
 

Page 42 GAO-15-67 Bank Capital Reforms

extensions of the foreign banking organizations, they do not have to be 

separately capitalized and can conduct a wide range of banking 

operations. Federal Reserve officials told us that they expect the U.S. 

Intermediate Holding Company provisions discussed below to reduce the 

variety of operations of foreign banking organizations in the United 

States.

The Federal Reserve, OCC, and FDIC supervise and regulate the U.S. 

banking operations of foreign banking entities. The Federal Reserve is 

responsible for the overall supervision and regulation of the foreign 

banking organizations in the United States. Branches and agencies are 

licensed and subject to supervision by OCC or state banking agencies. 

Subsidiary banks of foreign banking organizations are chartered by OCC 

or state banking agencies, and supervised by OCC, FDIC, or the Federal 

Reserve or state banking agencies. Although subsidiaries that are 

required to abide by U.S. Basel III capital regulations may be owned or 

controlled by the foreign banking organization, they are separate legal 

entities.

As shown in figure 1, Basel III capital regulations of FDIC, the Federal 

Reserve, and OCC generally apply to U.S. and foreign banking entities, 

except for foreign branches and agencies. However, some regulatory 

differences could arise—for example, if the subsidiaries of foreign 

banking entities that are required to abide by U.S. Basel III capital 

regulations are independent or will be required to form a U.S. 

intermediate holding company.
 

Page 43 GAO-15-67 Bank Capital Reforms

Figure 1: Applicability of U.S. Basel III Capital Regulations to Different Types of Foreign Banking Entities

Foreign banking organizations. The Federal Reserve requires foreign 

banking organizations with U.S. banking operations with total 

consolidated assets of $50 billion or more to be subject to the 

international Basel III capital requirements as established in their home 
 

Page 44 GAO-15-67 Bank Capital Reforms

country.66 These banks must certify to the Federal Reserve that they 

meet capital adequacy standards on a consolidated basis established by 

their home-country supervisor that are consistent with Basel III standards. 

If the home-country supervisor has not established capital adequacy 

standards consistent with Basel III, the foreign banking organization must 

demonstrate to the Federal Reserve that it would meet or exceed capital 

adequacy standards on a consolidated basis that are consistent with 

Basel III were it subject to that standard.67

Branches and agencies. Branches and agencies of foreign banking 

organizations are not subject to U.S. Basel III capital requirements 

because foreign banking organizations may operate through branches 

and agencies in the United States on the basis of their home-country 

capital standards. According to OCC, because federal branches and 

agencies have no segregated capital base and are only part of a foreign 

banking organization’s earnings stream, measurement of capital at risk is 

not meaningful for them.

If a foreign banking 

organization fails to satisfy the Basel III requirements, the Federal 

Reserve may impose requirements, conditions, or restrictions, including 

risk-based or leverage capital requirements, on the activities or business 

operations of the U.S. operations of the foreign banking organization. 

None of FDIC’s Basel III capital rules are applicable to foreign banking 

organizations.

68

 

66Federal Reserve regulations state that foreign banking organization with less than $50 

billion in total consolidated assets are not subject to U.S. Basel III risk-based and leverage 

capital standards. Enhanced Prudential Standards for Bank Holding Companies and 

Foreign Banking Organizations. 79 Fed. Reg. 17240, 17245 (March 27, 2014).

6779 Fed. Reg. 17240, 17325, 17330 (March 27, 2014); 12 C.F.R. § 252.143(a)(2) and 12 

C.F.R. § 252.154(a)(2).

68Nonetheless, pursuant to its regulations predating the U.S. implementation of Basel III 

and discretion, OCC requires federal branches and agencies to maintain certain levels of 

cash-equivalent deposits to protect depositors, safeguard the public interest, and maintain 

a sound financial condition. Cash-equivalent deposits include investment securities 

eligible for investment by national banks, U.S.-dollar-denominated deposits payable in the 

United States, and certificates of deposit payable in the United States. 12 C.F.R. § 28.15. 

FDIC rules require a foreign bank that has an insured branch to pledge assets to help 

protect the Deposit Insurance Fund. 12 C.F.R. § 347.209(a). Furthermore, FDIC rules 

provide the methodology for calculating the amount of assets to be pledged, which 

generally is a certain percentage of an insured branch’s liabilities. 12 C.F. R. § 347.209(b).
 

Page 45 GAO-15-67 Bank Capital Reforms

U.S. intermediate holding companies. In March 2014, the Federal 

Reserve finalized a rule to require larger foreign banking organizations 

based overseas and having material U.S. operations to establish a U.S. 

intermediate holding company (U.S. IHC) for consolidated supervision of 

their U.S. subsidiaries.69 According to the Federal Reserve, the 

requirement facilitates a level playing field between foreign and U.S. 

banking organizations operating in the United States, in furtherance of 

national treatment and competitive equity. Under the rule, U.S. IHCs 

would be subject to Basel III capital requirements substantially similar to 

those for U.S. bank holding companies. However, those U.S. IHCs that 

are advanced approaches banking organizations may choose to calculate 

their risk-weighted assets according to the standardized or advanced

approaches risk-based capital rules.70

 

6979 Fed. Reg. 17240 (March 27, 2014). A U.S. intermediate holding company is a top tier 

U.S. holding company that must be created by July 1, 2016, by a foreign banking 

organization with $50 billion or more in U.S. nonbranch assets on July 1, 2015. By July 1, 

2016, the U.S. intermediate holding company must hold the foreign banking organization’s 

ownership interests in any U.S. bank holding company subsidiary, any depository 

institution subsidiary, and in U.S. subsidiaries representing 90 percent of the foreign 

banking organization’s assets not held by the bank holding company or depository 

institution. But the foreign banking organization has until July 1, 2017, to transfer its 

ownership interests in any residual U.S. subsidiaries to the U.S. intermediate holding 

company. The foreign banking organizations that meet the $50 billion threshold after July 

1, 2015, must establish the U.S. intermediate holding company beginning on the first day 

of the ninth quarter after it meets or exceeds the asset threshold unless granted an 

extension by the Federal Reserve. A foreign banking organization also can designate an 

existing subsidiary that meets certain requirements as its U.S. intermediate holding 

company. A U.S. intermediate holding company is required by the Federal Reserve to 

hold a foreign banking organization’s entire ownership interest in any U.S. subsidiaries, 

with certain exemptions. A foreign banking organization can request permission to 

structure the U.S. intermediate holding company in different formations with Federal 

Reserve approval. A U.S. intermediate holding company must be organized under the law 

of the United States or any state or the District of Columbia and be governed by a board of 

directors or managers elected or appointed in a manner equivalent to a company 

chartered as a corporation under U.S. law. The final rule states that the U.S. intermediate 

holding company provides for consistent application of capital, and other, prudential 

requirements across the U.S. non-branch operations of the foreign banking organization 

and a single nexus for risk management of those U.S. non-branch operations.

Conversely, U.S. bank holding 

companies that meet the asset threshold are automatically treated as 

advanced approaches banking organizations and must abide by the riskbased capital rule calculation requirements. FDIC officials told us that the 

agency will not regulate U.S. IHCs under FDIC’s Basel III capital rules, 

70U.S. IHCs that are advanced approaches are those with $250 billion or more in 

consolidated assets or $10 billion or more in total foreign on-balance-sheet exposure.
 

Page 46 GAO-15-67 Bank Capital Reforms

because U.S. IHCs are subject to the Federal Reserve’s Basel III capital 

rules.71

Subsidiaries. Subsidiaries regulated under U.S. Basel III capital 

regulations, regardless of whether they are subsidiaries of foreign 

banking organizations or domestic subsidiaries, must abide by 

substantially similar rules.72 The Federal Reserve requires subsidiaries—

including any Federal Reserve-regulated institution such as state member 

banks and top-tier bank holding companies—subject to its supervision to 

comply with the U.S. Basel III capital regulations. Exceptions include 

small bank holding companies and foreign-owned U.S. bank holding 

companies relying on a capital exemption (until it is eliminated).73 OCC 

requires subsidiary institutions that fall within the defined entities subject 

to OCC’s Basel III capital rules to comply with the rules, regardless of 

whether they are a subsidiary of a foreign banking entity. Similarly, FDIC 

requires subsidiary institutions that fall within the defined entities subject 

to Basel III capital rules to comply with those rules, regardless of whether 

they are a subsidiary of a foreign banking entity.

 

71In the final rule creating U.S. intermediate holding companies, the Federal Reserve 

stated that U.S. intermediate holding companies will have a range of functionally regulated 

subsidiaries, including broker-dealers, insurance companies, and insured depository 

institutions. It further states the final rule imposes rules on the U.S. intermediate holding 

company and not on functionally regulated subsidiaries of the foreign banking 

organization, in the same way that those rules are applied to domestic bank holding 

companies. 79 Fed. Reg. 17240, 17277. 

72This includes subsidiaries regulated under U.S. Basel III capital regulations whether or 

not those subsidiaries will be located within a U.S. intermediate holding company. 

73Following the Gramm-Leach-Bliley Act, in January 2001, the Federal Reserve issued 

Supervision and Regulation Letter 01-1, which states that as a general matter a U.S. bank 

holding company that is owned and controlled by a foreign bank that is a financial holding 

company that the Federal Reserve determined to be well-capitalized and well-managed 

will not be required to comply with the Federal Reserve’s capital adequacy guidelines. The 

Dodd-Frank Act eliminated the capital exemption that the Federal Reserve provided to 

certain foreign-owned intermediate holding companies. The act requires that after a 5-year 

phase-in period after enactment of the act, these companies must satisfy the capital 

requirements of a subsidiary.
 

Page 47 GAO-15-67 Bank Capital Reforms

Although the Basel capital standards serve to harmonize capital 

regulations internationally, there are limitations to full harmonization. The

Basel capital standards have no legal force; rather, the Basel Committee 

members developed and agreed to the standards, with the expectation 

that each member will implement them.74 According to the Basel 

Committee, it encourages convergence towards common standards and 

monitors their implementation, but does not attempt detailed 

harmonization of members’ supervisory approaches. The standards are 

minimum requirements, and members may adopt more stringent 

standards. Moreover, as jurisdictions amend their laws or regulations (or 

both) to implement the Basel III standards, they will need to fit the 

standards within their existing legal framework, regulatory system, or 

industry structure. As the Basel capital standards periodically have been 

revised and implemented, regulators, banks, and others have raised 

concerns about regulatory differences between jurisdictions and their 

possible competitive effects. For example, in 2007 and 2008, we reported 

on such concerns arising from the U.S. implementation of Basel II.75

Importantly, internationally active banks can be subject not only to their 

home-country Basel III regulations but also their host-country Basel III 

regulations, such as through their foreign subsidiaries. As a result, such 

banks may need to create systems that take into account different 

regulatory regimes and approaches. However, according to four G-SIBs 

we spoke with, all transactions completed by an internationally active 

bank are consolidated ultimately at the parent company for capital 

purposes. In turn, the parent company must calculate its capital ratios 

based on its home-country’s capital regulations. If Basel III regulations 

are more stringent in the United States than in other countries, 

internationally active U.S. banks could be required to hold higher levels of 

regulatory capital than their foreign counterparts, and banks and some 

law firms have noted that this could potentially put internationally active 

U.S. banks at a competitive disadvantage. However, regulators and some 

 

74Under their charter, Basel Committee members commit to implement and apply the 

Basel standards in their domestic jurisdictions within the pre-defined timeframe 

established by the Basel Committee.

75See GAO, Risk-Based Capital: New Basel II Rules Reduced Certain Competitive 

Concerns, but Bank Regulators Should Address Remaining Uncertainties, GAO-08-953 

(Washington, D.C.: Sept. 12, 2008) and Risk-Based Capital: Bank Regulators Need to

Improve Transparency and Overcome Impediments to Finalizing the Proposed Basel II 

Framework, GAO-07-253 (Washington, D.C.: Feb. 15, 2007).

Market Participants and 

Observers Have Identified 

Some Basel III 

Implementation 

Differences between 

Jurisdictions but the 

Competitive Effects Are 

Unclear
 

Page 48 GAO-15-67 Bank Capital Reforms

academics have noted that enhanced capital requirements could 

decrease systemic risk in the banking system or increase investor 

confidence, potentially providing banks holding relatively more capital with 

a competitive advantage.

Although Basel III implementation is ongoing and will not be completed 

for years, some banks, regulators, and law firms (in publications we 

reviewed) have identified a number of implementation differences 

between jurisdictions that may create competitive disparities. Many of 

these differences have resulted from jurisdictions imposing more stringent 

requirements than the Basel III minimum standards, which could put their 

banking organizations at a competitive disadvantage.76

• Additional capital buffers: The Swiss Financial Market Supervisory 

Authority designed its capital regulations to impose a variable 

progressive capital buffer of up to 6 percent of risk-weighted assets on 

two Swiss G-SIBs. The overall higher capital requirements reflect the 

regulator’s prudential philosophy that Switzerland’s capital adequacy 

regulations should go beyond the international minimum standards. 

As UBS reported in its 2013 annual report, this requirement could 

harm Swiss banks when they compete against peer financial 

institutions subject to more lenient regulation. Similarly, the Bank of 

England’s Prudential Regulation Authority plans to implement a firmspecific buffer that could require certain banks to hold regulatory 

capital above the Basel III framework’s minimum standards.

Basel III’s 

implementation is a multistep process that includes the adoption of the 

standards by jurisdictions through changes in law or regulations, 

compliance with the law or regulations by market participants, and the 

oversight and supervision of the laws or regulations by national 

regulators. To date, differences initially identified by market participants 

and observers have focused on the different ways that jurisdictions have 

adopted the standards in their regulations, including the following:

• Credit valuation adjustment: Basel III included a new capital charge 

(the credit valuation adjustment) under which a bank must hold 

additional capital when entering into an over-the-counter derivatives 

transaction not cleared through a central counterparty. According to 

market participants we interviewed and law firm documents, the EU 

 

76Raising capital standards above minimum requirements is sometimes described as 

“super-equivalence” or “gold plating.” 
 

Page 49 GAO-15-67 Bank Capital Reforms

has diverged from Basel III (and the U.S. adoption of Basel III) by 

exempting transactions from the capital charge where such 

transactions are between EU-based banks and a nonfinancial 

corporate, sovereign, or for a limited period, pension fund. According 

to officials from three G-SIBs we interviewed, the exemption enables 

European banks to price derivative transactions to such 

counterparties more favorably than their non-EU competitors. Officials 

from one of the banks told us that the price difference could be a key 

factor in determining if customers transacted with U.S. versus

European banks, but price was not necessarily the only factor that 

customers considered.

• Enhanced supplementary leverage ratio: U.S. banking regulators 

established a minimum supplementary leverage ratio of 3 percent for 

advanced approaches banks, consistent with Basel III. However, the 

regulators established an enhanced supplementary leverage ratio for 

top-tier bank holding companies with more than $700 billion in total 

consolidated assets or more than $10 trillion in assets under custody 

and in their subsidiary depository institutions. This enhanced ratio 

raised the standards above the Basel III minimum standards. Under 

the final rule, such subsidiary insured depository institutions must 

maintain an enhanced supplementary ratio of at least 6 percent to be

well capitalized under the prompt corrective action framework, and the 

bank holding companies must maintain a buffer of more than 2 

percent above the minimum supplementary leverage ratio 

requirement of 3 percent to avoid restrictions on capital distributions 

and discretionary bonus payments.77 According to an industry 

association and bank we interviewed, the leverage requirement will 

disadvantage such U.S. banking organizations by requiring them to 

maintain higher capital than their competitors in other jurisdictions. 

However, U.S. banking regulators view a strong regulatory capital 

base as a competitive strength for banking organizations, rather than 

a competitive weakness.

• Collins Amendment: In the U.S. Basel III capital regulations, federal 

banking regulators implemented section 171 of the Dodd-Frank Act 

(the Collins Amendment) which requires advanced approaches 

banking organizations to calculate their risk-based capital ratios under 

 

77Prompt Corrective Action requires regulators to classify banks into one of five capital 

categories and take increasingly severe actions as a bank’s capital deteriorates. 
 

Page 50 GAO-15-67 Bank Capital Reforms

both the advanced approaches and the standardized approach 

(minimum risk-based capital requirements), among other capital 

requirements. The banks then must use the lower of each capital ratio 

to determine compliance with minimum capital requirements. 

According to a law firm’s analysis, the rule eliminates capital relief that 

large U.S. banks might otherwise obtain using their internal models 

under the advanced approaches and may provide certain 

internationally active foreign banks with a competitive advantage. 

Additionally, officials from three U.S. G-SIBs generally told us that the 

Collins Amendment could require them to hold more regulatory capital 

than their foreign competitors and put them at a competitive 

disadvantage.

• Liquidity coverage ratio: Basel III includes the liquidity coverage 

ratio as an internationally harmonized quantitative liquidity standard, 

with the goal of promoting the short-term resilience of the liquidity risk 

profile of internationally active banking organizations. Although at the 

time we spoke with the G-SIBs, U.S. banking regulators had not 

finalized their proposed rule implementing Basel III’s liquidity 

coverage ratio, officials from four G-SIBs said the proposed rule 

included requirements more stringent than the Basel III liquidity 

standards, including a narrower range of assets that qualified as highquality liquid assets and a faster assumed rate of outflows for 

wholesale funding. They said the rule, as proposed, would require 

them to hold more liquid assets than their foreign competitors, which 

would be more costly for them. The U.S. banking regulators noted in 

the proposed rule and final rule that there were modifications to Basel 

III’s liquidity coverage ratio to reflect characteristics and risks of 

specific aspects of the U.S. market. For instance, the proposed and 

final rules both recognized the strong liquidity positions U.S. banking 

organizations already achieved and discussed the need to maintain 

that improved liquidity through the use of shorter transition periods 

than mandated in Basel III. The proposed and final rule also differed 

from Basel III in the method for calculating total net cash outflows; 

regulators described the difference as necessary because the change 

would allow companies to better capture their own liquidity risk.

In addition to differences in Basel III regulations between jurisdictions, 

officials from two G-SIBs noted potential inconsistencies in the oversight 

and supervision of Basel III regulations. For example, such officials said 

that U.S. regulators have been more rigorous in their review and approval 

of internal models used by advanced approaches banks for calculating 

their risk weights under Basel II, as demonstrated by the long time it has 

taken these banks to pass their parallel run under the Basel II regulations. 
 

Page 51 GAO-15-67 Bank Capital Reforms

In contrast, banks in the EU, Canada, and Japan had begun 

implementing Basel II in 2008. At that time, the EU implementation of 

Basel II ahead of the United States raised competitive concerns because 

of the potential for EU banks to be required to hold less regulatory capital 

to support the same level of assets. Basel Committee and other studies 

indicated that U.S. banks tended to be subject to higher risk weights than 

EU banks, in part due to their use of the Basel I and Basel II frameworks, 

respectively.78

While differences exist in the implementation of Basel III between 

jurisdictions, the extent to which these differences collectively will affect 

competition among internationally active banks is unclear. As shown in 

table 7 above, Basel Committee member jurisdictions have not finished 

adopting regulations to implement Basel III capital, leverage, and liquidity 

standards. Moreover, the identified implementation differences cover 

multiple jurisdictions and apply to different aspects of Basel III, 

confounding their potential effect on competition. According to officials 

from two G-SIBs, it is very difficult or impossible to measure quantitatively 

the effect of such differences on competition. In addition to regulatory 

capital requirements, other factors can affect the competitive position of 

internationally active banks, such as differences in accounting treatment, 

cost of capital, tax rules, and other regulations from one country to 

another. For example, the spread or fee that banks charge for a financial 

product is a function not only of their regulatory capital requirements but 

also their cost of capital, which is driven by a variety of factors, and tax 

rates. Additionally, officials from three G-SIBs told us the Dodd-Frank Act 

and other reforms could affect the extent to which Basel III can help 

provide a level playing field. For example, they said that their minimum 

regulatory capital ratios effectively are set under the annual CCAR, which 

has resulted in regulatory capital ratios higher than the Basel III minimum 

At the same time, comparing risk weights across banks is 

difficult, in part because of differences in business mix, accounting rules, 

off-balance sheet assets, and approaches for calculating risk-weighted 

assets.

 

78See, for example, Vanessa Le Leslé and Sofiya Avramova, Revisiting Risk-Weighted 

Assets: Why Do RWAs Differ Across Countries and What Can Be Done About It?, IMF 

Working Paper, WP/12/90 (March 2012).
 

Page 52 GAO-15-67 Bank Capital Reforms

ratios. They also said that the EU has been adopting similar stress tests 

for EU banks.79

We provided a draft of this report to FDIC, Federal Reserve, and OCC for 

their review and comment. FDIC, the Federal Reserve, and OCC 

provided technical comments that we incorporated as appropriate.

We are sending copies of this report to the appropriate congressional 

committees and the Chairman of FDIC, Chairman of the Federal Reserve, 

and Comptroller of OCC. This report will also be available at no charge on 

our website at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact 

me at (202) 512-8678 or evansl@gao.gov. Contact points for our Office of 

Congressional Relations and Public Affairs may be found on the last page

of this report. Key contributors to this report are listed in appendix III.

Sincerely yours, 

Lawrance L. Evans, Jr.

Director, Financial Markets and

 Community Investment

 

79As noted above, the Bank of England’s Prudential Regulation Authority plans to 

implement a firm-specific buffer that could require certain banks to hold regulatory capital 

above the Basel III minimum requirements. According to a consultation paper, the 

Prudential Regulation Authority will set the buffers based on a range of factors including 

firm-specific stress test results.

Agency Comments
Appendix I: Objectives, Scope, and 

Methodology

Page 53 GAO-15-67 Bank Capital Reforms

This report examines how (1) U.S. Basel III capital may affect U.S. 

banking organizations, including smaller banking organizations, and (2) 

implementation of Basel III’s capital and other standards by different 

jurisdictions may affect the ability of U.S. banking organizations to 

compete internationally.

To assess how the U.S. Basel III capital regulation may impact U.S. 

banking organizations, including smaller organizations, we used data 

from the Consolidated Financial Statements for Holding Companies–

Form FR Y-9C (Y-9C) and from the Consolidated Reports of Condition 

and Income (Call Reports) as of March 31, 2014, to estimate (1) the 

number of bank holding companies and depository institutions with capital 

ratios greater than or equal to Basel III minimum capital ratios; (2) the 

amount of capital bank holding companies and depository institutions 

would need to meet the U.S. Basel III minimum capital requirements; and 

(3) the change in funding costs for bank holding companies and 

depository institutions associated with the amount of capital they would 

need to meet the minimum capital requirements. We assessed the 

reliability of the data from the Y-9Cs and Call Reports for these purposes 

by reviewing relevant documentation and by electronically testing the data 

for missing or incorrect values and for outliers. For more information on 

our methodology, our results, and the limitations of our analysis, see 

appendix II.

To understand how the higher capital requirements might affect the cost 

and availability of credit in terms of three outcomes—the cost of capital to 

banks, the interest rate paid by borrowers, and the quantity of loans by 

banks, we conducted a literature survey of recent economic studies that 

examined the effect of higher capital requirements on these three 

outcomes. To identify relevant empirical studies, we conducted searches 

of two databases, (ProQuest and EconLit) and identified and selected 

economic studies from peer-reviewed journals and working papers from 

governmental institutions that were published from 2011 through 2014. 

We used search terms for selecting the studies, such as interest rate 

spread, credit availability, cost of capital, and partial equilibrium. For 

articles with abstracts, two team members independently reviewed each

abstract to determine if the article addressed the previously identified 

topics and appeared to contain empirical data. If both reviewers agreed 

that the article was relevant, it was saved for further review. When 

reviewers disagreed, a third team member reviewed the abstract and 

made the final decision. The selected studies then were evaluated to 

determine if the methods were appropriate or sufficiently rigorous. A GAO 

economist performed a secondary review and confirmed that the methods 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 54 GAO-15-67 Bank Capital Reforms

met our criteria for methodological quality and were sufficiently rigorous to 

assess estimates of the cost and availability of capital. Based on our 

selection criteria, we identified 11 studies. One analyst then performed an 

in-depth review of the findings and summarized the research in a data 

collection instrument that captured the title, authors, outcomes of interest 

and key findings. A GAO economist performed a secondary review and 

confirmed our reported understanding of the findings. For a complete list

of the studies, see the Bibliography.

To assess the short-run impact on the cost and availability of credit of 

bank holding companies or depository institutions raising capital, we used 

estimates of changes in loan volumes and loan spreads associated with 

changes in capital from our prior work together with our estimates of the 

capital shortfall described above.1 To assess the long-run impact, we 

used an existing loan pricing model together with our estimates of the 

changes in funding costs described above.2

In addition, we judgmentally selected eight community banks based on 

their total assets and geographic locations and interviewed them to obtain 

their views on the impact of the U.S. Basel III capital regulations on their 

compliance costs and credit availability. We defined a community bank as 

a subsidiary bank with $10 billion or less in assets as of December 31, 

2013. Although no commonly accepted definition of a community bank 

exists, this size-based definition has been used by the Board of 

Governors of the Federal Reserve System (Federal Reserve). Using the 

SNL database, we developed a list of 5,849 subsidiary banks with assets 

of less than $10 billon. We then placed the community banks into one of 

the following four asset categories: (1) $1 to less than $500 million, (2) 

$500 million to less than $1billion, (3) $1 billion to less than $5 billion, and 

(4) $5 billion to less than $10 billion. Based on the U.S. Census 

classification, we further placed the community banks into one of the 

following four regions (1) East, (2) Midwest, (3) South, and (4) West. 

Within the categories of region and asset size, we randomly selected 10 

banks. We assumed that a sample with a mix of different bank sizes and 

 

1

The GAO model is a version of existing vector autoregression models found in the 

macroeconomic and monetary literature extended to include a banking sector. For fuller 

description of the model and limitations see GAO-12-237. 

2

The loan pricing model we used is described in Douglas J. Elliott, A Primer on Bank 

Capital. We used a modified version of this model in prior work; see GAO-12-237. 
Appendix I: Objectives, Scope, and 

Methodology

Page 55 GAO-15-67 Bank Capital Reforms

geographic areas would provide a wide range of views and experiences. 

Nonetheless, the information collected from this sample of banks cannot 

be generalized to the larger population of all community banks. To ensure 

that we captured the views of banks that are most prevalent in this 

population (banks with smaller asset sizes) as well those from asset 

categories that have a larger share of total assets (banks with larger 

asset sizes), we attempted to select at least four banks from the lower 

two asset categories and four banks from the upper two asset categories.

We also attempted to include in our sample at least two from each region 

while allowing for an additional bank in two regions with a larger number 

of community banks. In three cases, we were unable to make contact with 

the sampled bank, so we randomly selected a substitute from the same 

region and asset category. One bank merged with another, but we 

retained the merged bank for our sample since it was in the same region 

and asset category as the bank we originally selected. In two cases, we 

were unable to make contact with or gain the participation from the 

originally selected banks or with multiple numbers of randomly selected 

substitute banks. As a result, the final sample consists of eight banks with 

only one bank in the East.

To determine the extent to which jurisdictional differences in 

implementation of Basel III’s standards may affect how various U.S. 

banking organizations compete, we judgmentally selected and 

interviewed 10 global systemically important banks (G-SIBs) operating in 

the United States, European Union, and Japan to obtain their views on 

the competitive differences resulting from implementation of the Basel III 

framework across jurisdictions. To better understand the connection 

between international competition and jurisdictional differences in 

implementation we reviewed law firm legal briefs and client documents, 

the academic literature on the role capital plays in bank competition, 

publicly available consulting firm documents, and annual reports and 

filings issued by publicly trading banking organizations. We also reviewed 

prior GAO reports and studies on competition issued by the banking 

regulators to examine historical connections between the regulatory 

environment an entity faces and its ability to compete internationally. We 

reviewed the European Union’s Capital Requirements Directive IV and 

the United Kingdom’s Prudential Regulation Authority Consultation Paper:

Strengthening capital standards: implementing CRD IV (August 2013).

For both objectives, we reviewed banking regulations for the U.S. Basel 

III capital standards, the supplementary leverage ratio, enhanced 

supplementary leverage ratio and the liquidity coverage ratio. We also 

reviewed prior GAO reports, studies on the Basel III framework and 
Appendix I: Objectives, Scope, and 

Methodology

Page 56 GAO-15-67 Bank Capital Reforms

regulatory reform issued by Federal Deposit Insurance Corporation, 

Federal Reserve, and Office of the Comptroller of the Currency, and law 

firms, and annual reports and filings issued by publicly traded banking 

organizations. We also interviewed officials from six industry associations 

representing U.S. or foreign banks (or both) operating in the United 

States.

We conducted this performance audit from December 2013 to November 

2014 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 57 GAO-15-67 Bank Capital Reforms

To assess how the U.S. Basel III capital regulation may impact U.S. 

banking organizations, including smaller organizations, we used data 

from the Consolidated Financial Statements for Holding Companies—

Form FR Y-9C (Y-9Cs) and from the Consolidated Reports of Condition 

and Income (Call Reports) as of March 31, 2014, to estimate (1) the 

number of bank holding companies and depository institutions with capital 

ratios that are greater than or equal to Basel III minimum capital ratios; (2) 

the amount of capital bank holding companies and depository institutions 

would need to take actions to meet the U.S. Basel III minimum capital 

requirements; and (3) the change in funding costs for bank holding 

companies and depository institutions associated with the amount of 

capital they would need to meet the minimum capital standards. We 

assessed the reliability of the data from the Y-9Cs and Call Reports for 

these purposes by reviewing relevant documentation and electronically 

testing the data for missing or incorrect values and outliers. We discussed 

the results of our analyses in the report’s body, but we presented only 

those estimates that combined the minimum capital ratios with the capital 

conservation buffer. The tables below present our results in more detail.

To estimate the number of holding companies and depository institutions 

with capital ratios that are greater than or equal to Basel III minimum 

capital ratios, we estimated the amounts of common equity tier 1 capital, 

additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations 

described in Schedule HC-R Parts I.B and II of the Y-9C along with the 

instructions to these parts of the Y-9C. The amounts of some balance 

sheet and income statement items used to calculate the amount of capital 

or the amount of risk-weighted assets cannot be observed for bank 

holding companies or depository institutions that are not subject to, or that 

do not elect to use, the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to 

assumptions made by the Federal Reserve Board and for a comparable 

analysis. We separated bank holding companies and depository 

institutions into groups based on their size measured in total assets and 

on their status as an advanced approaches holding company (for bank 

holding companies) or a subsidiary of an advanced approaches holding 

company (for depository institutions). The groups of bank holding 

companies we analyzed are those with

• $500 million to less than $1 billion in assets,

• $1 billion to less than $10 billion in assets,

• $10 billion to less than $50 billion in assets,

Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, 

and Funding Costs
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 58 GAO-15-67 Bank Capital Reforms

• $50 billion or more in assets but not using the advanced approaches 

framework, and

• $50 billion or more in assets and using the advanced approaches.

The groups of depository institutions we analyzed are those with

• less than $1 billion in assets,

• $1 billion to less than $10 billion in assets,

• $10 billion to less than $50 billion in assets,

• $50 billion or more in assets, and

• those that are subsidiaries of advanced approaches holding 

companies (regardless of their size).

We used our estimates of the amounts of capital and risk-weighted assets 

to estimate the ratios of common equity tier 1 capital to risk-weighted 

assets, tier 1 capital to risk-weighted assets, total capital to risk-weighted 

assets, and tier 1 capital to average assets for each bank holding 

company and depository institution. We then compared the estimated 

capital ratios to the Basel III minimum capital ratios, both with and without 

the capital conservation buffer, and counted the numbers of bank holding 

companies and depository institutions with estimated capital ratios that 

met and did not meet the Basel III minimum capital ratios.

To estimate the amount of capital bank holding companies and depository 

institutions would need to raise to meet U.S. Basel III capital 

requirements, we calculated the amount of capital required to meet the 

U.S. Basel III minimum (the capital shortfall), in billions of dollars and as a 

percentage of total assets for each capital ratio, for bank holding 

companies and depository institutions with capital ratios less than the 

Basel III minimums. For each capital ratio, we then calculated the median 

capital shortfall for bank holding companies and depository institutions 

with insufficient capital relative to the Basel III minimums. For each capital 

ratio, we also calculated the total capital shortfall for all bank holding 

companies and depository institutions with insufficient capital in billions of 

dollars and as a percentage of the total assets of all bank holding 

companies and depository institutions we analyzed.

To estimate the change in funding costs for bank holding companies and 

depository institutions that need to raise capital, we first estimated the 

change in funding cost per dollar of assets associated with a 1 

percentage point increase in the ratio of equity capital to assets by 
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 59 GAO-15-67 Bank Capital Reforms

calculating the difference between return on equity and the after-tax 

interest rate on debt. We used the median return on equity (net income as 

a percentage of equity capital) and the median interest rate on debt 

(interest expense as a percentage of interest-bearing liabilities) for each 

group of bank holding companies and depository institutions for the first 

quarter of 2014, and we assumed that the marginal corporate income tax 

rate equaled 35 percent. For bank holding companies and depository 

institutions of different sizes and different status (as advanced 

approaches holding companies or subsidiaries of advanced approaches 

holding companies) and with capital ratios less than the Basel III 

minimums, we estimated the median change in funding cost associated 

with raising capital sufficient to meet the Basel III minimums by 

multiplying the median capital shortfall as a percentage of assets by the 

estimated change in funding cost.

Our estimates of the numbers of bank holding companies and depository 

institutions with capital ratios exceeding Basel III minimums and of the 

capital shortfall are subject to limitations. Most importantly, the amounts 

of some balance sheet and income statement items used to calculate the 

amount of capital or the amount of risk-weighted assets cannot be 

observed for bank holding companies or depository institutions that are 

not subject to or that do not elect to use the advanced approaches rule. 

We made assumptions about these unobservable amounts that are 

similar to assumptions the Board of Governors of the Federal Reserve 

System made for a comparable analysis.1

Our estimates of the increase in funding costs associated with raising 

capital also are subject to several limitations. First, as we discuss above, 

our estimates of the capital shortfall are subject to limitations and may 

However, we cannot assess 

the extent to which our estimates overstate or understate the numbers of 

bank holding companies and depository institutions that already met 

Basel III capital standards or the capital shortfall. In addition, some bank 

holding companies and depository institutions may want to maintain a 

capital in excess of the regulatory minimum levels to satisfy investors or 

other market participants. In this case, our estimates likely understate the 

number of bank holding companies and depository institutions that will 

raise capital and also understate the amount of capital raised.

 

1

See Michael S. Gibson, testimony before the Subcommittee on Financial Institutions and 

Consumer Credit and Subcommittee on Insurance, Housing, and Community Opportunity 

(Nov. 29, 2012).
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 60 GAO-15-67 Bank Capital Reforms

overstate or understate the amount of capital that bank holding 

companies and depository institutions raise in response to the new Basel 

III standards. Because the increase in funding costs is related to the size 

of the capital shortfall, our estimates of the increase may be overstated or 

understated. In particular, some bank holding companies or depository 

institutions may maintain capital in excess of the minimum requirements 

(a capital buffer). The larger the capital buffer, the more funding costs will 

increase and the more our estimates will understate them. In addition, our 

estimates reflect the median amounts of capital required by bank holding 

companies and depository institutions we estimated to have insufficient 

capital to meet Basel III standards, may not reflect the specific 

circumstances of an individual bank holding company or depository 

institution that may need to raise capital, and may overstate or understate 

the change in its funding cost. Furthermore, our estimates reflect the 

median return on equity and interest rate on debt that prevailed in the first 

quarter of 2014, as well as our assumption of a corporate income tax rate 

of 35 percent. However, equity returns, debt interest rates, and tax rates 

may change, altering the relative prices of debt and equity and thus 

altering the change in funding costs associated with substituting equity for 

debt. Finally, our estimates assume that the return on equity will not 

change when a bank holding company or depository institution increases 

its capital ratio. However, increasing reliance on equity funding reduces 

the risks to investors, all else being equal. If a bank holding company or 

depository institution increased its ratio of capital to assets, then the 

return on its equity could fall as investors demanded less of a risk 

premium.

We used our estimates of the amounts of capital and risk-weighted assets 

to estimate the ratios of common equity tier 1 capital to risk-weighted 

assets, tier 1 capital to risk-weighted assets, total capital to risk-weighted 

assets, and tier 1 capital to average assets for each bank holding 

company and depository institution. We then compared the estimated 

capital ratios to the Basel III minimum capital ratios, with and without the 

capital conservation buffer, and counted the numbers of bank holding 

companies and depository institutions with estimated capital ratios that 

met and did not meet the Basel III minimum capital ratios. Our estimates 

are presented in table 8.

Analysis of Basel III 

Minimum Capital Ratios
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 61 GAO-15-67 Bank Capital Reforms

Table 8: Estimated Number of Bank Holding Companies and Depository Institutions That Met Basel III Minimum Capital Ratios 

by Size and Advanced Approaches Status, as of the First Quarter 2014

Bank holding companies

Estimated capital ratio greater than or equal to 

Basel III minimum?

$500 

million-1 

billion in 

assets

$1 billion10 billion 

in assets

$10

billion-50 

billion in 

assets

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50B or 

more in 

assets, 

advanced 

approaches Total

Common equity tier 1 capital ratio (4.5 

percent)

No 29 7 1 0 0 37

Yes 507 414 49 17 16 1,003

Common equity tier 1 capital ratio plus 

capital conservation buffer (7.0 

percent)

No 60 25 2 0 0 87

Yes 476 396 48 17 16 953

Tier 1 capital ratio (6 percent) No 33 9 2 0 0 44

Yes 503 412 48 17 16 996

Tier 1 capital ratio plus capital 

conservation buffer (8.5 percent)

No 79 45 4 1 1 130

Yes 457 376 46 16 15 910

Total capital ratio (8 percent) No 27 5 1 0 0 33

Yes 509 416 49 17 16 1,007

Total capital ratio plus capital 

conservation buffer (10.5 percent)

No 88 51 4 0 0 143

Yes 448 370 46 17 16 897

Tier 1 leverage ratio (4 percent) No 28 7 2 0 0 37

Yes 508 414 48 17 16 1,003

Total number of bank holding 

companies

536 421 50 17 16 1,040

Depository institutions

Estimated capital ratio greater than or equal to 

Basel III minimum?

Less than 

$1 billion 

in assets

$1 billion10 billion 

in assets

$10

billion-50 

billion in 

assets

$50 billion 

or more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies Total

Common equity tier 1 capital ratio (4.5 

percent)

No 44 2 0 0 0 46

Yes 6,070 561 63 18 36 6,748

Common equity tier 1 capital ratio plus 

capital conservation buffer (7.0 

percent)

No 103 4 0 0 0 107

Yes 6,011 559 63 18 36 6,687

Tier 1 capital ratio (6 percent) No 61 1 0 0 0 62

Yes 6,053 562 63 18 36 6,732

Tier 1 capital ratio plus capital 

conservation buffer (8.5 percent)

No 137 8 1 0 0 146

Yes 5,977 555 62 18 36 6,648

Total capital ratio (8 percent) No 84 3 0 0 0 87

Yes 6,030 560 63 18 36 6,707
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 62 GAO-15-67 Bank Capital Reforms

Total capital ratio plus capital 

conservation buffer (10.5 percent)

No 218 16 2 0 0 236

Yes 5,896 547 61 18 36 6,558

Tier 1 leverage ratio (4 percent) No 54 1 0 0 0 55

Yes 6,060 562 63 18 36 6,739

Total number of depository 

institutions 

6,114 563 63 18 36 6,794

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to Federal Reserve Board 

assumptions for a comparable analysis. We used our estimates of the amounts of capital and riskweighted assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 

capital to risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average 

assets for each bank holding company and depository institution. We then compared the estimated 

capital ratios to the Basel III minimum capital ratios, with and without the capital conservation buffer, 

and counted the numbers of bank holding companies and depository institutions with estimated 

capital ratios that met and did not meet the Basel III minimum capital ratios.

For bank holding companies and depository institutions with capital ratios 

less than the Basel III minimums, we calculated the amount of capital 

required to meet the Basel III minimums (the capital shortfall), both in 

billions of dollars and as a percentage of total assets. For each capital 

ratio, we then calculated the median capital shortfall for bank holding 

companies and depository institutions with insufficient capital relative to 

the Basel III minimums. Our estimates are presented in table 9.

Analysis of Capital 

Shortfall
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 63 GAO-15-67 Bank Capital Reforms

Table 9: Median Estimated Additional Capital Needed to Meet Basel III Minimum Capital Ratios by Size and Advanced 

Approaches Status, as of the First Quarter 2014

Bank holding companies

Median estimated additional capital 

needed to meet Basel III minimum 

capital ratio for bank holding 

companies with estimated capital 

ratio less than Basel III minimum

$500 million-1 

billion in assets

$1 billion 

-10 billion 

in assets

$10

billion-50 

billion in 

assets 

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50 billion 

or more in 

assets, 

advanced 

approaches All

Common equity tier 1 capital $ Billions 0.01 0.05 1.59 —- —- 0.02

% Assets 3.42 2.85 4.48 —- —- 3.22

Common equity tier 1 capital plus 

capital conservation buffer

$ Billions 0.01 0.02 1.12 —- —- 0.01

% Assets 1.86 1.40 3.39 —- —- 1.65

Tier 1 capital $ Billions 0.01 0.02 0.97 —- —- 0.01

% Assets 2.24 0.72 2.76 —- —- 1.21

Tier 1 capital plus capital conservation 

buffer

$ Billions 0.01 0.01 0.15 0.01 0.02 0.01

% Assets 1.53 0.63 0.93 0.01 0.01 1.03

Total capital $ Billions 0.01 0.03 2.20 —- —- 0.01

% Assets 2.46 1.28 6.21 —- —- 2.17

Total capital plus capital conservation 

buffer

$ Billions 0.01 0.02 0.15 —- —- 0.01

% Assets 1.16 0.73 1.07 —- —- 1.00

Tier 1 capital for leverage ratio $ Billions 0.01 0.00 0.99 —- —- 0.01

% Assets 2.46 0.36 2.79 —- —- 1.49

Depository institutions

Median estimated additional capital 

needed to meet Basel III minimum 

capital ratio for depository

institutions with estimated capital 

ratio less than Basel III minimum

Less than $1 

billion in assets

$1 billion10 billion 

in assets

$10

billion -50 

billion in 

assets

$50 billion 

or more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies All

Common equity tier 1 capital $ Billions <0.01 0.11 —- —- —- <0.01

% Assets 1.16 4.36 —- —- —- 1.21

Common equity tier 1 capital plus 

capital conservation buffer

$ Billions <0.01 0.04 —- —- —- <0.01

% Assets 1.52 2.40 —- —- —- 1.52

Tier 1 capital $ Billions <0.01 0.02 —- —- —- <0.01

% Assets 1.44 1.51 —- —- —- 1.44

Tier 1 capital plus capital conservation 

buffer

$ Billions <0.01 0.02 0.18 —- —- <0.01

% Assets 1.62 1.16 1.52 —- —- 1.60

Total capital $ Billions <0.01 0.02 —- —- —- <0.01

% Assets 1.39 1.94 —- —- —- 1.42

Total capital plus capital conservation 

buffer

$ Billions <0.01 0.02 0.07 —- —- <0.01

% Assets 1.23 0.83 0.22 —- —- 1.21
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 64 GAO-15-67 Bank Capital Reforms

Tier 1 capital for leverage ratio $ Billions <0.01 0.02 —- —- —- <0.01

% Assets 1.23 2.18 —- —- —- 1.29

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to assumptions the Federal Reserve 

made for a comparable analysis. We used our estimates of the amounts of capital and risk-weighted 

assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 capital to 

risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average assets for 

each bank holding company and depository institution. We then compared the estimated capital ratios 

to the Basel III minimum capital ratios, with and without the capital conservation buffer. For each 

capital ratio, for bank holding companies and depository institutions with capital ratios less than the 

Basel III minimums, we calculated the amount of capital required to meet the Basel III minimum (the

capital shortfall), both in billions of dollars and as a percentage of total assets.

For each capital ratio, we also calculated the total capital shortfall for all 

bank holding companies and depository institutions with insufficient 

capital in billions of dollars and as a percentage of the total assets of all 

the bank holding companies and depository institutions we analyzed. Our 

estimates are presented in table 10.
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 65 GAO-15-67 Bank Capital Reforms

Table 10: Total Estimated Additional Capital Needed to Meet Basel III Minimum Standards by Size and Advanced Approaches 

Status, as of the First Quarter 2014

Bank holding companies

Total estimated additional capital 

needed to meet Basel III minimum 

capital ratio for all bank holding 

companies combined

$500 million1 billion in 

assets

$1 billion10 billion 

in assets

$10

billion-50 

billion in 

assets

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50 billion 

or more in 

assets, 

advanced 

approaches Total

Common equity tier 1 capital $ Billions 0.56 0.72 1.59 0 0 2.86

% Assets 0.16 0.06 0.16 0 0 0.02

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions 1.00 1.48 2.24 0 0 4.73

% Assets 0.28 0.13 0.22 0 0 0.03

Tier 1 capital $ Billions 0.48 0.28 1.93 0 0 2.69

% Assets 0.13 0.02 0.19 0 0 0.02

Tier 1 capital plus capital conservation 

buffer

$ Billions 1.04 1.17 2.76 0.01 0.02 5.00

% Assets 0.29 0.11 0.27 <0.01 <0.01 0.03

Total capital $ Billions 0.43 0.20 2.20 0 0 2.84

% Assets 0.12 0.02 0.22 0 0 0.02

Total capital plus capital conservation 

buffer

$ Billions 1.04 1.25 3.13 0 0 5.42

% Assets 0.29 0.11 0.31 0 0 0.03

Tier 1 capital for leverage Ratio $ Billions 0.40 0.20 1.97 0 0 2.57

% Assets 0.11 0.02 0.19 0 0 0.02

Depository institutions

Total estimated additional capital 

needed to meet Basel III minimum 

capital ratio for all depository 

institutions combined

Less than $1 

billion in 

assets

$1 billion10 billion 

in assets

$10

billion-50 

billion in 

assets

$50 billion 

or more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies Total

Common equity tier 1 capital $ Billions 0.18 0.22 0 0 0 0.40

% Assets 0.01 0.02 0 0 0 <0.01

Common equity tier 1 capital plus capital 

conservation buffer

$ Billions 0.49 0.27 0 0 0 0.76

% Assets 0.04 0.02 0 0 0 0.01

Tier 1 capital $ Billions 0.24 0.02 0 0 0 0.26

% Assets 0.02 <0.01 0 0 0 <0.01

Tier 1 capital plus capital conservation 

buffer

$ Billions 0.66 0.21 0.18 0 0 1.05

% Assets 0.05 0.01 0.01 0 0 0.01

Total capital $ Billions 0.34 0.22 0 0 0 0.56

% Assets 0.02 0.01 0 0 0 <0.01

Total capital plus capital conservation 

buffer

$ Billions 0.88 0.54 0.14 0 0 1.57

% Assets 0.06 0.04 0.01 0 0 0.01
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 66 GAO-15-67 Bank Capital Reforms

Tier 1 capital for leverage ratio $ Billions 0.18 0.02 0 0 0 0.21

% Assets 0.01 <0.01 0 0 0 <0.01

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: For each bank holding company and depository institution, we estimated the amounts of 

common equity tier 1 capital, additional tier 1 capital, tier 1 capital, tier 2 capital, and total capital 

(collectively, capital) and risk-weighted assets using the calculations described in Schedule HC-R 

Parts I.B and II of the Y-9C along with the instructions to these parts of the Y-9C. The amounts of 

some balance sheet and income statement items used to calculate the amount of capital or the 

amount of risk-weighted assets cannot be observed for bank holding companies or depository 

institutions that are not subject to or do not elect to use the advanced approaches rule. We made 

assumptions about these unobservable amounts that are similar to assumptions the Federal Reserve 

made for a comparable analysis. We used our estimates of the amounts of capital and risk-weighted 

assets to estimate the ratios of common equity tier 1 capital to risk-weighted assets, tier 1 capital to 

risk-weighted assets, total capital to risk-weighted assets, and tier 1 capital to average assets for 

each bank holding company and depository institution. We then compared the estimated capital ratios 

to the Basel III minimum capital ratios, with and without the capital conservation buffer. For each 

capital ratio, we then calculated the total capital shortfall for all bank holding companies and 

depository institutions with insufficient capital in billions of dollars and as a percentage of the total 

assets of all bank holding companies and depository institutions.

For bank holding companies and depository institutions of different sizes 

and different status as advanced approaches holding companies or 

subsidiaries of advanced approaches holding companies, we estimated 

the change in funding cost per dollar of assets associated with a 1 

percentage point increase in the ratio of equity capital to assets. Funding 

costs are determined by the prices of equity and debt financing sources 

and the amounts used of each. Because interest payments on debt are 

tax-deductible, a more leveraged capital structure reduces corporate 

taxes, lowering funding costs. Thus, an increase in the required amount 

of equity capital would increase a bank’s cost of capital. The increased 

funding cost associated with a 1 percentage point increase in the capital 

ratio of a bank holding company or depository institution is approximately 

equal to the difference between the return on equity and the after-tax 

interest rate on debt, all else being equal.2

 

2

Funding costs are invariant to changes in the capital ratio if taxes are neutral; firms have 

no transactions costs, asset trade restrictions, or bankruptcy costs; firms and investors 

can borrow or lend at the same rate; and firms reveal no information in financial policy. 

Under these conditions, changes in the capital ratio lead to changes in equity returns that 

leave funding costs unchanged. However, we explicitly assume that taxes are not neutral. 

We also assume that returns on equity and interest rates on debt do not change when a 

bank holding company or depository institution increases its capital ratio. We note that this 

effect could be offset to some extent if the additional capital protection caused the riskpremiums demanded by an institution’s investors to decline sufficiently.

We used the median return on 

equity (net income as a percentage of equity capital) and the median 

Analysis of Funding Cost 

Associated with the 

Capital Shortfall
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 67 GAO-15-67 Bank Capital Reforms

interest rate on debt (interest expense as a percentage of interest-bearing 

liabilities) for each group of bank holding companies and depository 

institutions for the first quarter of 2014, and we assumed that the marginal 

corporate income tax rate is equal to 35 percent. Our estimates are 

presented in table 11.

Table 11: Median Return on Equity, Median Interest Rate on Debt, and Estimated Change in Funding Costs Associated with1 

Percentage Point Increase in Equity Capital Ratio by Size and Advanced Approaches Status, as of the First Quarter 2014

Bank holding companies

$500 million1 billion in 

assets

$1billion-10 

billion in 

assets

$10 billion50 billion 

in assets

$50 billion or 

more in assets, 

not advanced 

approaches

$50 billion or 

more in assets, 

advanced 

approaches All

Median return on equity for all bank 

holding companies (%) 8.13 8.57 8.11 7.89 9.16 8.30

Median interest rate on debt for all bank 

holding companies (%) 0.64 0.54 0.43 0.47 0.56 0.60

Corporate income tax rate (%) 35 35 35 35 35 35

Estimated change in funding cost 

associated with a 1 percentage point 

increase in ratio of equity capital to 

assets (percentage points) 0.08 0.08 0.08 0.08 0.09 0.08

Depository institutions

Less than $1 

billion in 

assets

$1billion-10 

billion in 

assets

$10 billion50 billion 

in assets

$50 billion or 

more in assets

Subsidiaries of 

advanced 

approaches 

holding 

companies All

Median return on equity for all depository 

institutions (%) 7.45 8.19 7.98 8.24 8.20 7.56

Median interest rate on debt for 

depository institutions (%) 0.58 0.49 0.42 0.36 0.22 0.57

Corporate income tax rate (%) 35 35 35 35 35 35

Estimated change in funding cost 

associated with a 1 percentage point 

increase in ratio of equity capital to 

assets (percentage points) 0.07 0.08 0.08 0.08 0.08 0.07

Source: GAO analysis of data from the Federal Reserve Bank of Chicago and the Federal Financial Institutions Examination Council. | GAO-15-67

Notes: We estimated the change in funding cost per dollar of assets associated with a 1 percentage 

point in the ratio of equity capital to assets by calculating the difference between return on equity and 

the after-tax interest rate on debt. We used the median return on equity (net income as a percentage

of equity capital) and the median interest rate on debt (interest expense as a percentage of interestbearing liabilities) for each group of bank holding companies and depository institutions for the first 

quarter of 2014, and we assumed that the marginal corporate income tax rate equaled 35 percent.
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 68 GAO-15-67 Bank Capital Reforms

For bank holding companies and depository institutions of different sizes 

and different status as advanced approaches holding companies or 

subsidiaries of advanced approaches holding companies and with capital 

ratios less than the Basel III minimums, we estimated the median change 

in funding cost associated with raising capital sufficient to meet the Basel 

III minimums by multiplying the median capital shortfall as a percentage

of assets by the estimated change in funding cost. Our estimates are 

presented in table 12.

Table 12: Estimated Changes in Funding Costs Associated with Raising Capital Needed to Meet Basel III Minimum Standards 

by Size, as of the First Quarter 2014 (Percentage Points)

Bank holding companies

Estimated change in funding costs 

from raising median estimated capital 

needed to meet Basel III minimum 

capital ratio for bank holding 

companies with estimated capital ratio 

less than Basel III minimum

$500 million-1 

billion in assets

$1 billion-10 

billion in 

assets

$10 billion50 billion in 

assets

$50 billion 

or more in 

assets, not 

advanced 

approaches

$50 billion 

or more in 

assets, 

advanced 

approaches All

Common equity tier 1 capital 0.26 0.23 0.35 —- —- 0.26

Common equity tier 1 capital plus capital 

conservation buffer

0.14 0.12 0.27 —- —- 0.13

Tier 1 capital 0.17 0.06 0.22 —- —- 0.10

Tier 1 capital plus capital conservation 

buffer

0.12 0.05 0.07 <0.01 <0.01 0.08

Total capital 0.19 0.11 0.49 —- —- 0.17

Total capital plus capital conservation 

buffer

0.09 0.06 0.08 —- —- 0.08

Tier 1 capital for leverage ratio 0.19 0.03 0.22 —- —- 0.12

Depository institutions

Estimated change in funding costs 

from raising median estimated capital 

needed to meet Basel III minimum 

capital ratio for depository institutions 

with estimated capital ratio less than 

Basel III minimum

Less than $1 billion 

in assets

$1 billion-10 

billion in 

assets

$10 billion50 billion in 

assets

$50 billion 

or more in 

assets

Subsidiaries 

of advanced 

approaches 

holding 

companies All

Common equity tier 1 capital 0.08 0.34 —- —- —- 0.09

Common equity tier 1 capital plus capital 

conservation buffer

0.11 0.19 —- —- —- 0.11

Tier 1 capital 0.10 0.12 —- —- —- 0.10

Tier 1 capital plus capital conservation 

buffer

0.11 0.09 0.12 —- —- 0.12

Total capital 0.10 0.15 —- —- —- 0.10
Appendix II: GAO Analyses of Basel III 

Minimum Capital Ratios, Capital Shortfall, and 

Funding Costs

Page 69 GAO-15-67 Bank Capital Reforms

Total capital plus capital conservation 

buffer

0.09 0.06 0.02 —- —- 0.09

Tier 1 capital for leverage ratio 0.09 0.17 —- —- —- 0.09

Source: GAO analysis of data from the Federal Financial Institutions Examination Council, the Federal Reserve Bank of Chicago, the U.S. Department of the Treasury, the Board of Governors of the 

Federal Reserve System, and the Organization of Economic Cooperation and Development. | GAO-15-67

Notes: We estimated the change in funding cost per dollar of assets associated with a 1 percentage 

point in the ratio of equity capital to assets by calculating the difference between return on equity and 

the after-tax interest rate on debt. We used the median return on equity (net income as a percentage

of equity capital) and the median interest rate on debt (interest expense as a percentage of interestbearing liabilities) for each group of bank holding companies and depository institutions for the first 

quarter of 2014, and we assumed that the marginal corporate income tax rate equaled 35 percent. 

We found that funding costs increase by about 0.07-0.09 percentage points with a 1 percentage point 

increase in the ratio of capital to assets, or by about $0.07-0.09 per $100 of assets. For bank holding 

companies and depository institutions of different sizes and different status (as advanced approaches 

holding companies or subsidiaries of advanced approaches holding companies) and with capital 

ratios less than the Basel III minimums, we estimated the median change in funding cost associated 

with raising capital sufficient to meet the Basel III minimums by multiplying the median capital shortfall 

as a percentage of assets by the estimated change in funding cost associated with a 1 percentage 

point increase in the capital ratio.
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 70 GAO-15-67 Bank Capital Reforms

Lawrance L. Evans, (202) 512-8678 or evansl@gao.gov

In addition to the contact name above, Richard Tsuhara (Assistant 

Director), Nancy Eibeck (Analyst-in-Charge), Jessica Artis, Chloe F. 

Brown, Pamela R. Davidson, Donald P. Hirasuna, Courtney L. 

LaFountain, Jon D. Menaster, Marc W. Molino, Barbara M. Roesmann, 

and Jessica M. Sandler made significant contributions to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments
Bibliography

Page 71 GAO-15-67 Bank Capital Reforms

We reviewed 11 recent empirical studies (published from 2011 through 

2014) that examined how higher capital standards might affect the cost 

and availability of credit in terms of three outcomes—the cost of capital to 

banks, the interest rate paid by borrowers, and the quantity of loans by 

banks.

Agenor, Pierre-Richard, Koray, Alper, and Luiz Pereira da Silva. “Capital 

Regulation, Monetary Policy, and Financial Stability.” International Journal 

of Central Banking, vol. 9, no. 3 (September 2013).

Baker, Malcolm, and Jeffrey Wurgler. “Do Strict Capital Requirements 

Raise the Cost of Capital? Banking Regulation and the Low Risk 

Anomaly.” National Bureau of Economic Research working paper 19018 

(May 2013).

Cosimano, Thomas F., and Dalia S. Hakura. “Bank Behavior in Response 

to Basel III: A Cross-Country Analysis.” International Monetary Fund 

working paper 11-119 (May 2011).

Corbae, Dean, and Pablo D’Erasmo. “Capital Requirements in a 

Quantitative Model of Banking Industry Dynamics”. Federal Reserve Bank 

of Philadelphia working paper 14-13 (April 2014).

Gauthier, Céline, Alfred Lehar, and Moez Souissi. “Macroprudential 

Capital Requirements and Systemic Risk.” Journal of Financial 

Intermediation, vol. 21, no. 4 (October 2012).

Martın-Oliver, Alfredo, Sonia Ruano, and Vicente Salas-Fumas. “Banks’ 

Equity Capital Frictions, Capital Ratios, and Interest Rates: Evidence from 

Spanish Banks.” International Journal of Central Banking, vol. 9, no. 1 

(March 2013).

Paries, Matthieu Darracq, Christoffer Kok Sørensen, and Diego 

Rodriguez-Palenzuela. “Macroeconomic Propagation under Different 

Regulatory Regimes: Evidence from an Estimated DSGE Model for the 

Euro Area.” International Journal of Central Banking, vol. 7, no. 4 

(December 2011).

Roger, Scott, and Francis Vitek. “The Global Macroeconomic Costs of 

Raising Bank Capital Adequacy Requirements.” International Monetary 

Fund working paper 12-44 (February 2012).

Bibliography
Bibliography

Page 72 GAO-15-67 Bank Capital Reforms

Slovik, Patrick, and Boris Cournède. “Macroeconomic Impact of Basel III.” 

Organisation for Economic Co-operation and Development Economics 

Department working paper 844 (February 14, 2011).

Šutorova, Barbora, and Petr Teply. “The Impact of Basel III on Lending 

Rates of EU Banks.” Czech Journal of Economics and Finance, vol. 63, 

no. 3 (2013).

Yan, Meilan, Maximilian J.B. Hall, and Paul Turner. “A Cost–Benefit 

Analysis of Basel III: Some Evidence from the UK.” International Review 

of Financial Analysis, vol. 25 (December 2012).

(250761)
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