Did Dodd-Frank Increase Bank Capital?

Just how much has bank capital increased since the passage of Dodd-Frank? It all depends on what you mean by capital. According to the FDIC, at the end of 2015, commercial banks had “total equity capital” of $1.8 trillion. This is certainly higher than the $1.5 trillion that existed at the time of Dodd-Frank’s passage. But bank assets also increased. What matters is the ratio of bank capital to total bank assets. At the passage of Dodd-Frank that ratio was 11.1. At year-end 2015, it was 11.2…
The minor increase in the overall bank capital-to-assets ratio becomes even less impressive when one realizes that it has been driven almost exclusively, not by new legal requirements, whether from Dodd-Frank of from Basel III, but by an increase in banks’ “undivided profits” — that is, in banks’ retained earnings that have yet to be distributed to shareholders. When most people think of capital, they mean the sort that represents “skin in the game,” or common equity. So what’s been the trend there? At the passage of Dodd-Frank, banks held $55.5 billion in common stock and perpetual preferred shares. At year-end 2015, that number was $52.7 billion. This decline is even more shocking when measured relative to assets, falling from 0.4 percent of assets to 0.3 percent of assets. Seems the so called claim about increased bank capital isn’t actually true, if you look at what most people would consider capital. There are still other ways to look at capital. The chart below, from the FDIC, illustrates the trend in the four most commonly used capital ratios. Total risk-based capital, the top line, actually shows a decline since the passage of Dodd-Frank. The other three measures show very minor increases. I’d say they were essentially flat. And even that relatively weak trend is the result of the Basel process, not Dodd-Frank.

Mark Calabria

Alt-M (blog)

March 18, 2016

External Link