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United States Government Accountability Office: 
GAO: 

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: 

GAO-15-67: 

GAO Highlights: 

Highlights of GAO-15-67, a report to the Chairman, Subcommittee on 
Financial Institutions and Consumer Credit, Committee on Financial 
Services, House of Representatives. 

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 III-based capital standards in the 
United States, which generally apply to U.S. Depository institutions 
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. 

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 Depository 
institutions 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 Depository institutions 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. 

What GAO Recommends: 

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. 

View [hyperlink, http://www.gao.gov/products/GAO-15-67]. For more 
information, contact Lawrance Evans at (202) 512-8678 or 
evansl@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

U.S. Basel III Capital Requirements May Have a Limited Effect on 
Capital in the Short Term but Are Expected to Increase Compliance 
Costs: 

The Basel Committee Is Taking Steps to Identify Basel III 
Implementation Inconsistencies: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Analyses of Basel III Minimum Capital Ratios, Capital 
Shortfall, and Funding Costs: 

Appendix III: GAO Contact and Staff Acknowledgments: 

Bibliography: 

Tables: 

Table 1: Federal Banking Regulators and Their Basic Functions: 

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

Table 3: Estimated Numbers of Depository institutions and Depository 
Institutions That Met Basel III Minimum Capital Ratios as of the First 
Quarter 2014, by Asset Size: 

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

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

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: 

Table 7: Implementation Status of the Basel III Capital Framework as 
Reported by Members of the Basel Committee, as of October 2014: 

Table 8: Estimated Number of Depository institutions and Depository 
Institutions That Met Basel III Minimum Capital Ratios by Size and 
Advanced Approaches Status, as of the First Quarter 2014: 

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: 

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: 

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: 

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): 

Figure: 

Figure 1: Applicability of U.S. Basel III Capital Regulations to 
Different Types of Foreign Banking Entities: 

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: 

[End of section] 

United States Government Accountability Office: 
GAO:
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.[Footnote 1] 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. 

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 Depository institutions and savings and loan holding 
companies.[Footnote 2] At the international level, in December 2010 
the Basel 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.[Footnote 3] 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. 

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).[Footnote 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.[Footnote 5] 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 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 publicly traded Depository 
institutions. 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 Depository institutions 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 
Depository institutions 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 Depository institutions 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 important banks (G-SIB) and home 
country) to obtain their views on the impact of the U.S. Basel III 
requirements.[Footnote 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 Depository institutions 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. 

Background: 

Federal Banking Regulators: 

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: Office of the Comptroller of the Currency; 
Basic function: Charters and supervises national banks and federally 
chartered savings associations. 

Agency: Board of Governors of the Federal Reserve System; 
Basic function: Supervises state-chartered banks that opt to be 
members of the Federal Reserve System, Depository institutions, 
savings and loan holding companies, the non-depository institution 
subsidiaries of those holding companies, and nonbank financial 
companies designated as systemically important financial institutions 
by the Financial Stability Oversight Council. 

Agency: Federal Deposit Insurance Corporation; 
Basic function: 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 Depository institutions and nonbank financial 
companies that are subject to supervision by the Federal Reserve and 
subject to enhanced prudential standards. 

Source: GAO. GAO-15-67. 

[End of table] 

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 Depository institutions and savings and loan holding 
companies, respectively.[Footnote 7] The Dodd-Frank Act made the 
Federal Reserve the regulator of savings and loan holding companies. 
[Footnote 8] 

Basel Capital Accord Framework: 

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.[Footnote 9] It consists of 
three basic elements: 

* 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, 

* 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 risk-weighted assets. Regulatory capital is the numerator 
of the ratio and risk-weighted assets constitute the denominator. In 
calculating a total risk-weighted 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.[Footnote 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.[Footnote 
11] 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 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 Depository 
institutions to reduce capital from Basel I. Large internationally 
active U.S. Depository institutions have been implementing the first 
phase--known as the parallel run--of the Basel II advanced approaches. 
[Footnote 12] As of February 21, 2014, eight advanced approaches 
Depository institutions 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.[Footnote 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 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 Depository institutions and introduces new leverage and 
liquidity standards.[Footnote 14] Liquidity is a measure of the 
ability and ease with which assets can be converted to cash.[Footnote 
15] More specifically, the new standards include: 

* 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); 

* 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.[Footnote 16] 

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). 

U.S. Implementation of Basel III and Other Banking Reforms: 

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).[Footnote 17] These regulations apply to: 

* Depository institutions with assets of $500 million or more and all 
non-exempt savings and loan holding companies; 

* national banks and federally chartered savings associations; and: 

* state-chartered banks (both non-member and member banks) and state 
savings associations.[Footnote 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.[Footnote 19] 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.[Footnote 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 Dodd-Frank Act, the Collins 
Amendment (discussed below) advanced approaches banking organizations 
will be required to calculate their risk-based 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. 

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

U.S Basel III requirement: Minimum regulatory capital ratios; 
Standardized approach banking organizations: Yes; 
Advanced approaches banking organizations: 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). 

U.S Basel III requirement: Capital conservation buffer; 
The buffer is composed entirely of common equity tier 1 capital 
(greater than 2.5 percent)[B]; 
Standardized approach banking organizations: Yes; 
Advanced approaches banking organizations: Yes. 

U.S Basel III requirement: 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); 
Standardized approach banking organizations: No; 
Advanced approaches banking organizations: Yes. 

U.S Basel III requirement: Leverage ratio; Ratio of tier 1 capital to 
average total consolidated assets in the balance sheet (4 percent); 
Standardized approach banking organizations: Yes; 
Advanced approaches banking organizations: Yes. 

U.S Basel III requirement: Supplementary leverage ratio; Tier 1 
capital divided by total leverage exposure, which includes on-balance 
sheet exposures, derivative exposures, securities financing 
transaction exposures, and other off-balance sheet exposures (3 
percent)[C]; 
Standardized approach banking organizations: No; 
Advanced approaches banking organizations: Yes. 

U.S Basel III requirement: 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; 
Standardized approach banking organizations: A less stringent modified 
ratio for Depository institutions and non-exempt savings and loan 
holding companies with assets of $50 billion or more; 
Advanced approaches banking organizations: Yes. 

U.S Basel III requirement: Net stable funding ratio; An amount of 
available stable funding relative to the amount of required stable 
funding[D]; 
Standardized approach banking organizations: Not applicable; 
Advanced approaches banking organizations: 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). 

[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-balance-sheet exposures. The federal banking 
regulators have not drafted a proposed regulation to implement the net 
stable funding ratio. 

[End of table] 

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.[Footnote 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 Depository 
institutions 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, 
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.[Footnote 22] For Depository institutions 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 
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. 

U.S. Basel III Capital Requirements May Have a Limited Effect on 
Capital in the Short Term but Are Expected to Increase Compliance 
Costs: 

The vast majority of banks and Depository institutions 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 Depository institutions 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 
Depository institutions 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. 

Analysis Suggests Most Depository institutions and Depository 
Institutions Currently Would Meet New Minimum Regulatory Capital 
Requirements: 

Our analysis suggests that as of the first quarter of 2014, the 
majority of Depository institutions 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 Depository institutions and depository 
institutions already met the fully phased-in Basel III minimum capital 
ratios, we analyzed balance sheet data for Depository institutions and 
depository institutions for the first quarter of 2014.[Footnote 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.[Footnote 24] In addition, 
we report the estimates separately for the 16 advanced approaches 
Depository institutions (including their bank subsidiaries), which 
accounted for nearly 75 percent of the total assets held by top-tier 
U.S. Depository institutions but less than 2 percent of the number of 
all such holding companies (as of the first quarter of 2014).[Footnote 
25] 

Basel III Minimum Capital Requirements: 

A majority of Depository institutions 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.[Footnote 26] As shown in table 
3, our analysis suggests that 953 of the 1,040 of the Depository 
institutions (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 Depository institutions 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. 

Table 3: Estimated Numbers of Depository institutions and Depository 
Institutions That Met Basel III Minimum Capital Ratios as of the First 
Quarter 2014, by Asset Size: 

Estimated capital ratio greater than or equal to Basel III minimum? 
Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); No; 
Depository institutions: 
$500 million-1 billion in assets: 60; 
$1 billion-10 billion in assets: 25; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 87. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); Yes; 
Depository institutions: 
$500 million-1 billion in assets: 476; 
$1 billion-10 billion in assets: 396; 
$10 billion-50 billion in assets: 48; 
$50 billion or more in assets, not advanced approaches: 17; 
$50 billion or more in assets, advanced approaches: 16; 
Total: 953. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
Depository institutions: 
$500 million-1 billion in assets: 79; 
$1 billion-10 billion in assets: 45; 
$10 billion-50 billion in assets: 4; 
$50 billion or more in assets, not advanced approaches: 1; 
$50 billion or more in assets, advanced approaches: 1; 
Total: 130. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
Depository institutions: 
$500 million-1 billion in assets: 457; 
$1 billion-10 billion in assets: 376; 
$10 billion-50 billion in assets: 46; 
$50 billion or more in assets, not advanced approaches: 16; 
$50 billion or more in assets, advanced approaches: 15; 
Total: 910. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Total capital ratio plus capital conservation buffer (10.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
Depository institutions: 
$500 million-1 billion in assets: 88; 
$1 billion-10 billion in assets: 51; 
$10 billion-50 billion in assets: 4; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 143. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
Depository institutions: 
$500 million-1 billion in assets: 448; 
$1 billion-10 billion in assets: 370; 
$10 billion-50 billion in assets: 46; 
$50 billion or more in assets, not advanced approaches: 17; 
$50 billion or more in assets, advanced approaches: 16; 
Total: 897. 

Total: 
Depository institutions: 
$500 million-1 billion in assets: 536; 
$1 billion-10 billion in assets: 421; 
$10 billion-50 billion in assets: 50; 
$50 billion or more in assets, not advanced approaches: 17; 
$50 billion or more in assets, advanced approaches: 16; 
Total: 1,040. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
Depository institutions: 
$500 million-1 billion in assets: 103; 
$1 billion-10 billion in assets: 4; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
Subsidiaries of advanced approaches holding companies: Total: 107. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); Yes; 
Depository institutions: 
$500 million-1 billion in assets: 6,011; 
$1 billion-10 billion in assets: 559; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets, not advanced approaches: 18; 
$50 billion or more in assets, not advanced approaches: 36; 
Total: 6,687. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
Depository institutions: 
$500 million-1 billion in assets: 137; 
$1 billion-10 billion in assets: 8; 
$10 billion-50 billion in assets: 1; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
Total: 146. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Yes; 
Depository institutions: 
$500 million-1 billion in assets: 5,977; 
$1 billion-10 billion in assets: 555; 
$10 billion-50 billion in assets: 62; 
$50 billion or more in assets, not advanced approaches: 18; 
$50 billion or more in assets, not advanced approaches: 36; 
Total: 6,648. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Total capital ratio plus capital conservation buffer (10.5 percent); 
No; 
Depository institutions: 
$500 million-1 billion in assets: 218; 
$1 billion-10 billion in assets: 16; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
Total: 236. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Total capital ratio plus capital conservation buffer (10.5 percent); 
Yes; 
Depository institutions: 
$500 million-1 billion in assets: 5,896; 
$1 billion-10 billion in assets: 547; 
$10 billion-50 billion in assets: 61; 
$50 billion or more in assets, not advanced approaches: 18; 
$50 billion or more in assets, not advanced approaches: 36; 
Total: 6,558. 

Total: 
Depository institutions: 
Depository institutions: 
$500 million-1 billion in assets: 6,114; 
$1 billion-10 billion in assets: 563; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets, not advanced approaches: 18; 
$50 billion or more in assets, not advanced approaches: 36; 
Total: Total: 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 Depository institutions 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 Depository institutions and depository institutions 
with estimated capital ratios that met and did not meet the Basel III 
minimum capital ratios. 

[End of table] 

Regulatory Capital Shortfall: 

The capital shortfalls for individual Depository institutions 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 Depository institutions 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 Depository institutions 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. 

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

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Common equity tier 1 capital plus capital conservation buffer; $ 
Billions; 
Depository institutions: 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 1.12; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Common equity tier 1 capital plus capital conservation buffer; % 
Assets; 
Depository institutions: $500 million-1 billion in assets: 1.86; 
$1 billion-10 billion in assets: 1.40; 
$10 billion-50 billion in assets: 3.39; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.65. 

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Tier 1 capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.01; 
$10 billion-50 billion in assets: 0.15; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.02; 
All: 0.01. 

Tier 1 capital plus capital conservation buffer; % Assets; 
Depository institutions: $500 million-1 billion in assets: 1.53; 
$1 billion-10 billion in assets: 0.63; 
$10 billion-50 billion in assets: 0.93; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.01; 
All: 1.03. 

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Total capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.15; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Total capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-1 billion in assets: 1.16; 
$1 billion-10 billion in assets: 0.73; 
$10 billion-50 billion in assets: 1.07; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.00. 

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
Depository institutions: 
$500 million-1 billion in assets: <0.01; 
$1 billion-10 billion in assets: 0.04; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: <0.01. 

Common equity tier 1 capital plus capital conservation buffer; 
% Assets; 
Depository institutions: 
$500 million-1 billion in assets: 1.52; 
$1 billion-10 billion in assets: 2.40; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.52. 

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Tier 1 capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.18; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Tier 1 capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-1 billion in assets: 1.62; 
$1 billion-10 billion in assets: 1.16; 
$10 billion-50 billion in assets: 1.52; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.60. 

Median estimated additional capital needed to meet Basel III minimum 
capital ratio for Depository institutions with estimated capital 
ratios less than Basel III minimum: 
Total capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.07; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Total capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-1 billion in assets: 1.23; 
$1 billion-10 billion in assets: 0.83; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 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 Depository institutions 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 Depository institutions 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. 

[End of table] 

Finally, as shown in table 5, our estimates of the total capital 
shortfall for all Depository institutions and depository institutions 
are relatively modest. For example, Depository institutions 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 Depository institutions 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: 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 1.00; 
$1 billion-10 billion in assets: 1.48; 
$10 billion-50 billion in assets: 2.24; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 4.73. 

Common equity tier 1 capital plus capital conservation buffer; % 
Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.28; 
$1 billion-10 billion in assets: 0.13; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.03. 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Tier 1 capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 1.04; 
$1 billion-10 billion in assets: 1.17; 
$10 billion-50 billion in assets: 2.76; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.02; 
Total: 5.00. 

Tier 1 capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.29; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: 0.27; 
$50 billion or more in assets, not advanced approaches: less than 0.01; 
$50 billion or more in assets, advanced approaches: less than 0.01; 
Total: 0.03. 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Total capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 1.04; 
$1 billion-10 billion in assets: 1.25; 
$10 billion-50 billion in assets: 3.13; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 5.42. 

Total capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.29; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: 0.31; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.03. 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 0.49; 
$1 billion-10 billion in assets: 0.27; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.76. 

Common equity tier 1 capital plus capital conservation buffer; % 
Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.04; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.01. 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Tier 1 capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 0.66; 
$1 billion-10 billion in assets: 0.21; 
$10 billion-50 billion in assets: 0.18; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 1.05. 

Tier 1 capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.05; 
$1 billion-10 billion in assets: 0.01; 
$10 billion-50 billion in assets: 0.01; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.01. 

Total estimated additional capital needed to meet Basel III minimum 
capital ratios for all Depository institutions combined: 
Total capital plus capital conservation buffer; $ Billions; 
Depository institutions: 
$500 million-$1 billion in assets: 0.88; 
$1 billion-10 billion in assets: 0.54; 
$10 billion-50 billion in assets: 0.14; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 1.57. 

Total capital plus capital conservation buffer; % Assets; 
Depository institutions: 
$500 million-$1 billion in assets: 0.06; 
$1 billion-10 billion in assets: 0.04; 
$10 billion-50 billion in assets: 0.01; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 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 Depository institutions 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 
Depository institutions and depository institutions with insufficient 
capital in billions of dollars and as a percentage of the total assets 
of all the Depository institutions and depository institutions. 

[End of table] 

Our estimates of the numbers of Depository institutions 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 Depository institutions 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. 
[Footnote 27] However, we cannot assess the extent to which our 
estimates overstate or understate the numbers of Depository 
institutions and depository institutions that already meet Basel III 
capital requirements or the capital shortfall. In addition, some 
Depository institutions 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 Depository institutions and depository 
institutions that would need to raise capital and also may understate 
the amount of capital they would need to raise. 

Funding and Other Costs: 

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 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.[Footnote 28] 

For Depository institutions 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.[Footnote 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. 
[Footnote 30] Similarly, the increase in funding cost associated with 
raising the median amount of common equity tier 1 capital for a 
capital-deficient 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). 

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: 

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: 
Common equity tier 1 capital plus capital conservation buffer; 
Bank holding companies: 
$500 million-1 billion in assets: 0.14; 
$1 billion-10 billion in assets: 0.12; 
$10 billion-50 billion in assets: 0.27; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.13. 

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: 
Tier 1 capital plus capital conservation buffer; 
Bank holding companies: 
$500 million-1 billion in assets: 0.12; 
$1 billion-10 billion in assets: 0.05; 
$10 billion-50 billion in assets: 0.07; 
$50 billion or more in assets, not advanced approaches: <0.01; 
$50 billion or more in assets, advanced approaches: <0.01; 
All: 0.08. 

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: 
Total capital plus capital conservation buffer; 
Bank holding companies: 
$500 million-1 billion in assets: 0.09; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.08; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.08. 

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: 
Common equity tier 1 capital plus capital conservation buffer; 
Depository institutions: 
$500 million-1 billion in assets: 0.11; 
$1 billion-10 billion in assets: 0.19; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.11. 

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: 
Tier 1 capital plus capital conservation buffer; 
Depository institutions: 
$500 million-1 billion in assets: 0.11; 
$1 billion-10 billion in assets: 0.09; 
$10 billion-50 billion in assets: 0.12; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.12. 

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: 
Total capital plus capital conservation buffer; 
Depository institutions: 
$500 million-1 billion in assets: 0.09; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.02; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 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 interest-bearing 
liabilities) for each group of Depository institutions 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 Depository institutions 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. 

[End of table] 

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 
Depository institutions 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 may be either overstated or 
understated. In particular, some Depository institutions 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 Depository institutions 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 significant burden for about 37 
percent of these banks.[Footnote 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. 

Empirical Research Indicates U.S. Basel III Capital Requirements Are 
Expected to Have a Modest Effect on the Cost and Availability of 
Credit: 

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. 

Empirical Studies We Reviewed Indicate Higher Regulatory Capital 
Requirements Negatively Affect 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.[Footnote 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.[Footnote 33] 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. 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. 
[Footnote 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.[Footnote 35] The study covered eight countries, and 
the estimates ranged from 0.00 percentage points (Canada) to 0.26 
percentage points (Japan).[Footnote 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.[Footnote 37] 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). 

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.[Footnote 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.[Footnote 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.[Footnote 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.[Footnote 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).[Footnote 42] 

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.[Footnote 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.[Footnote 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.[Footnote 45] 

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: 

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 
Depository institutions 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 Depository institutions 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 Depository institutions 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 estimates of the 
capital shortfall described above.[Footnote 46] To assess the long-run 
impact, we used an existing loan pricing model.[Footnote 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 Depository institutions 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 Depository institutions 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 Depository institutions and depository institutions that increase 
equity capital to meet Basel III minimum capital ratios could 
increase. Depository institutions and depository institutions can 
respond to changes in their funding costs in several ways, including 
raising loan rates, shifting lending activity to lower-risk borrowers, 
and increasing efficiency. If Depository institutions 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 
Depository institutions 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, Depository institutions 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 Depository institutions 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. 

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: 

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. 
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.[Footnote 48] 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. 

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 Dodd-Frank 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. 

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 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 non-banking sector.[Footnote 49] 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 short-term securities financing 
transactions. 

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. 

The Basel Committee Is Taking Steps to Identify Basel III 
Implementation Inconsistencies: 

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 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. 

Most Member Jurisdictions Have Implemented Basel III Capital 
Requirements, but Committee Assessments Found Some Inconsistencies: 

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).[Footnote 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.[Footnote 51] Basel Committee members generally reported that 
they have not yet adopted regulations to implement these requirements. 

Table 7: Implementation Status of the Basel III Capital Framework as 
Reported by Members of the Basel Committee, as of October 2014: 

Jurisdiction: Argentina; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Australia; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: Completed; 
Leverage ratio: In progress. 

Jurisdiction: Brazil; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: Not started; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Canada; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: China; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: Completed; 
Leverage ratio: In progress. 

Jurisdiction: Hong Kong Special Administrative Region; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: Not started. 

Jurisdiction: India; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Indonesia; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Japan; 
Risk-based capital: In progress; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: Not started. 

Jurisdiction: Korea; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: Not started. 

Jurisdiction: Mexico; 
Risk-based capital: In progress; 
G-SIBs and Domestic Systemically Important Banks: Not started; 
Liquidity coverage ratio: Not started; 
Leverage ratio: Not started. 

Jurisdiction: Russia; 
Risk-based capital: In progress; 
G-SIBs and Domestic Systemically Important Banks: Completed; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Saudi Arabia; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: Completed; 
Leverage ratio: In progress. 

Jurisdiction: Singapore; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: South Africa; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Switzerland; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: Completed; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Turkey; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: Not started; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: United States; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: Not started; 
Liquidity coverage ratio: In progress; 
Leverage ratio: Completed. 

Jurisdiction: European Union[A]; 
Risk-based capital: Completed[B]; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Belgium; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: France; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Germany; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Italy; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Luxembourg; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Netherlands; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Spain; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: Sweden; 
Risk-based capital: Completed; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: In progress. 

Jurisdiction: United Kingdom; 
Risk-based capital: In progress; 
G-SIBs and Domestic Systemically Important Banks: In progress; 
Liquidity coverage ratio: In progress; 
Leverage ratio: 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. 

[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. 

[End of table] 

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.[Footnote 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.[Footnote 53] RCAP 
assessments are designed as peer reviews undertaken by technical 
experts from member jurisdictions and are done on a jurisdictional and 
thematic basis. 

Jurisdictional RCAP Assessment: 

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 which G-SIBs are 
domiciled.[Footnote 54] 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. 

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.[Footnote 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.[Footnote 56] 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 
minimum standards.[Footnote 57] 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. 

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.[Footnote 58] 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 
Dodd-Frank 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. 

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.[Footnote 59] 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. 

Thematic RCAP Assessments: 

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.[Footnote 60] 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 risk-weighting their assets, 
because differences in the application of the Basel 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 risk-weighted 
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 risk-
weighted 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.[Footnote 61] Similarly, the RCAPs 
examining risk-weighted assets in the trading book found considerable 
variation in the calculation of risk-weighted assets for market risk 
across banks.[Footnote 62] Supervisory decisions applied to all banks 
in a jurisdiction or to individual banks were deemed to be a sizable 
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 be implemented to improve consistency and comparability in bank 
capital ratios.[Footnote 63] 

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: 

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.[Footnote 64] 

Foreign banking organizations (such as foreign parent banks) have 
structured their U.S. banking operations in a number of ways.[Footnote 
65] 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 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. 

Figure 1: Applicability of U.S. Basel III Capital Regulations to 
Different Types of Foreign Banking Entities: 

[Refer to PDF for image: illustration] 

Federal Reserve: Agency determined that it would not apply U.S. Basel 
III regulations to the entity: 
Foreign banking organization. 

Federal Reserve: Entity is subject to requirements similar to U.S. 
Basel III regulations: 
U.S. Intermediate Holding Company (as of July 2016). 

Federal Reserve: Entity is subject to U.S. Basel III regulations: 
Board regulated institutions[A] (Subsidiary). 

Office of the Comptroller of the Currency: Entity is subject to U.S. 
Basel III regulations: 
National banks and federal savings associations (Subsidiary). 

Federal Deposit Insurance Corporation: Entity is subject to U.S. Basel 
III regulations: 
FDIC supervised institutions[B] (Subsidiary). 

Federal Deposit Insurance Corporation: Agency determined that it would 
not apply U.S. Basel III regulations to the entity: 
U.S. Intermediate Holding Company (as of July 2016). 

Federal Deposit Insurance Corporation[A]: Agency determined that it 
would not apply U.S. Basel III regulations to the entity: 
Foreign banking organization. 

[A] Federal Reserve-supervised institutions include state member 
banks, certain bank holding companies and covered savings and loan 
holding companies. 

[B] FDIC-supervised institutions include state nonmember banks and 
state savings associations. The nonmember banks include FDIC-insured, 
state charted commercial or savings banks not members of the Federal 
Reserve system and for which the FDIC is the appropriate Federal 
banking agency under 12 U.S.C. § 1813(q). State savings associations 
including building and loan associations, savings and loan 
associations or homestead associations or cooperative banks with 
certain exemptions that are organized and operating under state law in 
the state it is chartered or organized. 

Source: GAO. GAO-15-67. 

[End of figure] 

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 country.[Footnote 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.[Footnote 67] 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. 

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.[Footnote 68] 

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.[Footnote 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. 
Depository institutions. 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.[Footnote 70] Conversely, U.S. Depository 
institutions that meet the asset threshold are automatically treated 
as advanced approaches banking organizations and must abide by the 
risk-based capital rule calculation requirements. FDIC officials told 
us that the agency will not regulate U.S. IHCs under FDIC's Basel III 
capital rules, because U.S. IHCs are subject to the Federal Reserve's 
Basel III capital rules.[Footnote 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.[Footnote 72] The Federal Reserve requires 
subsidiaries--including any Federal Reserve-regulated institution such 
as state member banks and top-tier Depository institutions--subject to 
its supervision to comply with the U.S. Basel III capital regulations. 
Exceptions include small Depository institutions and foreign-owned 
U.S. Depository institutions relying on a capital exemption (until it 
is eliminated).[Footnote 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. 

Market Participants and Observers Have Identified Some Basel III 
Implementation Differences between Jurisdictions but the Competitive 
Effects Are Unclear: 

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.[Footnote 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.[Footnote 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 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.[Footnote 76] 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: 

* 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 firm-
specific buffer that could require certain banks to hold regulatory 
capital above the Basel III framework's minimum standards. 

* 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 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 Depository institutions 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 
Depository institutions 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.[Footnote 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 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 high-quality 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. 
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.[Footnote 78] 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. 

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 ratios. 
They also said that the EU has been adopting similar stress tests for 
EU banks.[Footnote 79] 

Agency Comments: 

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 [hyperlink, 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, 

Signed by: 

Lawrance L. Evans, Jr. 
Director, Financial Markets and Community Investment: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

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 Depository institutions and depository institutions with capital 
ratios greater than or equal to Basel III minimum capital ratios; (2) 
the amount of capital Depository institutions and depository 
institutions would need to meet the U.S. Basel III minimum capital 
requirements; and (3) the change in funding costs for Depository 
institutions 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 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 Depository institutions 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.[Footnote 80] 
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.[Footnote 81] 

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 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 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. 

[End of section] 

Appendix II: GAO Analyses of Basel III Minimum Capital Ratios, Capital 
Shortfall, and Funding Costs: 

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 Depository institutions and depository institutions with capital 
ratios that are greater than or equal to Basel III minimum capital 
ratios; (2) the amount of capital Depository institutions 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 Depository institutions 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 Depository institutions 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 Depository 
institutions and depository institutions into groups based on their 
size measured in total assets and on their status as an advanced 
approaches holding company (for Depository institutions) or a 
subsidiary of an advanced approaches holding company (for depository 
institutions). The groups of Depository institutions 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, 

* $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 Depository institutions 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 Depository institutions 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 Depository institutions and depository institutions with capital 
ratios less than the Basel III minimums. For each capital ratio, we 
then calculated the median capital shortfall for Depository 
institutions 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 Depository institutions 
and depository institutions with insufficient capital in billions of 
dollars and as a percentage of the total assets of all Depository 
institutions and depository institutions we analyzed. 

To estimate the change in funding costs for Depository institutions 
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 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 Depository institutions and depository 
institutions for the first quarter of 2014, and we assumed that the 
marginal corporate income tax rate equaled 35 percent. For Depository 
institutions 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 Depository institutions 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 Depository institutions 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.[Footnote 82] 
However, we cannot assess the extent to which our estimates overstate 
or understate the numbers of Depository institutions and depository 
institutions that already met Basel III capital standards or the 
capital shortfall. In addition, some Depository institutions 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 Depository institutions and depository institutions that will raise 
capital and also understate the amount of capital raised. 

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 overstate or understate the amount of capital that 
Depository institutions 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 
Depository institutions 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 Depository 
institutions 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. 

Analysis of Basel III Minimum Capital Ratios: 

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 Depository institutions 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. 

Table 8: Estimated Number of Depository institutions 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? 

Common equity tier 1 capital ratio (4.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 29; 
$1 billion-10 billion in assets: 7; 
$10 billion-50 billion in assets: 1; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 37. 

Common equity tier 1 capital ratio (4.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 507; 
$1 billion-10 billion in assets: 414; 
$10 billion-50 billion in assets: 49; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 1,003. 

Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 60; 
$1 billion-10 billion in assets: 25; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 87. 

Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 476; 
$1 billion-10 billion in assets: 396; 
$10 billion-50 billion in assets: 48; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 953. 

Tier 1 capital ratio (6 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 33; 
$1 billion-10 billion in assets: 9; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 44. 

Tier 1 capital ratio (6 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 503; 
$1 billion-10 billion in assets: 412; 
$10 billion-50 billion in assets: 48; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 996. 

Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 79; 
$1 billion-10 billion in assets: 45; 
$10 billion-50 billion in assets: 4; 
$50 billion or more in assets, not advanced approaches: 1; 
$50B or more in assets, advanced approaches: 1; 
Total: 130. 

Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 457; 
$1 billion-10 billion in assets: 376; 
$10 billion-50 billion in assets: 46; 
$50 billion or more in assets, not advanced approaches: 16; 
$50B or more in assets, advanced approaches: 15; 
Total: 910. 

Total capital ratio (8 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 27; 
$1 billion-10 billion in assets: 5; 
$10 billion-50 billion in assets: 1; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 33. 

Total capital ratio (8 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 509; 
$1 billion-10 billion in assets: 416; 
$10 billion-50 billion in assets: 49; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 1,007. 

Total capital ratio plus capital conservation buffer (10.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 88; 
$1 billion-10 billion in assets: 51; 
$10 billion-50 billion in assets: 4; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 143. 

Total capital ratio plus capital conservation buffer (10.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 448; 
$1 billion-10 billion in assets: 370; 
$10 billion-50 billion in assets: 46; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 897. 

Tier 1 leverage ratio (4 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 28; 
$1 billion-10 billion in assets: 7; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets, not advanced approaches: 0; 
$50B or more in assets, advanced approaches: 0; 
Total: 37. 

Tier 1 leverage ratio (4 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 508; 
$1 billion-10 billion in assets: 414; 
$10 billion-50 billion in assets: 48; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 1,003. 

Total number of Depository institutions; 
Estimated capital ratio greater than or equal to Basel III minimum? 
$500 million-1 billion in assets: 536; 
$1 billion-10 billion in assets: 421; 
$10 billion-50 billion in assets: 50; 
$50 billion or more in assets, not advanced approaches: 17; 
$50B or more in assets, advanced approaches: 16; 
Total: 1,040. 

Depository institutions: 

Common equity tier 1 capital ratio (4.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 44; 
$1 billion-10 billion in assets: 2; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 46. 

Common equity tier 1 capital ratio (4.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 6,070; 
$1 billion-10 billion in assets: 561; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,748. 

Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 103; 
$1 billion-10 billion in assets: 4; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 107. 

Common equity tier 1 capital ratio plus capital conservation buffer 
(7.0 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 6,011; 
$1 billion-10 billion in assets: 559; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,687. 

Tier 1 capital ratio (6 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 61; 
$1 billion-10 billion in assets: 1; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 62. 

Tier 1 capital ratio (6 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 6,053; 
$1 billion-10 billion in assets: 562; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,732. 

Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 137; 
$1 billion-10 billion in assets: 8; 
$10 billion-50 billion in assets: 1; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 146. 

Tier 1 capital ratio plus capital conservation buffer (8.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 5,977; 
$1 billion-10 billion in assets: 555; 
$10 billion-50 billion in assets: 62; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,648. 

Total capital ratio (8 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 84; 
$1 billion-10 billion in assets: 3; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 87. 

Total capital ratio (8 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 6,030; 
$1 billion-10 billion in assets: 560; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,707. 

Total capital ratio plus capital conservation buffer (10.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 218; 
$1 billion-10 billion in assets: 16; 
$10 billion-50 billion in assets: 2; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 236. 

Total capital ratio plus capital conservation buffer (10.5 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 5,896; 
$1 billion-10 billion in assets: 547; 
$10 billion-50 billion in assets: 61; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,558. 

Tier 1 leverage ratio (4 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? No; 
$500 million-1 billion in assets: 54; 
$1 billion-10 billion in assets: 1; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 55. 

Tier 1 leverage ratio (4 percent); 
Estimated capital ratio greater than or equal to Basel III minimum? 
Yes; 
$500 million-1 billion in assets: 6,060; 
$1 billion-10 billion in assets: 562; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 6,739. 

Estimated capital ratio greater than or equal to Basel III minimum? 
Total number of depository institutions; 
Estimated capital ratio greater than or equal to Basel III minimum? 
[Empty]; 
$500 million-1 billion in assets: 6,114; 
$1 billion-10 billion in assets: 563; 
$10 billion-50 billion in assets: 63; 
$50 billion or more in assets: 18; 
Subsidiaries of advanced approaches holding companies: 36; 
Total: 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 Depository institutions 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 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 Depository institutions and depository institutions 
with estimated capital ratios that met and did not meet the Basel III 
minimum capital ratios. 

[End of table] 

Analysis of Capital Shortfall: 

For Depository institutions 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 Depository institutions and depository institutions with 
insufficient capital relative to the Basel III minimums. Our estimates 
are presented in table 9. 

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 Depository institutions with estimated capital ratio 
less than Basel III minimum: 

Common equity tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.05; 
$10 billion-50 billion in assets: 1.59; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.02. 

Common equity tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 3.42; 
$1 billion-10 billion in assets: 2.85; 
$10 billion-50 billion in assets: 4.48; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 3.22. 

Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 1.12; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Common equity tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.86; 
$1 billion-10 billion in assets: 1.40; 
$10 billion-50 billion in assets: 3.39; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.65. 

Tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.97; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 2.24; 
$1 billion-10 billion in assets: 0.72; 
$10 billion-50 billion in assets: 2.76; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.21. 

Tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.01; 
$10 billion-50 billion in assets: 0.15; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.02; 
All: 0.01. 

Tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.53; 
$1 billion-10 billion in assets: 0.63; 
$10 billion-50 billion in assets: 0.93; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.01; 
All: 1.03. 

Total capital; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.03; 
$10 billion-50 billion in assets: 2.20; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Total capital; 
% Assets; 
$500 million-1 billion in assets: 2.46; 
$1 billion-10 billion in assets: 1.28; 
$10 billion-50 billion in assets: 6.21; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 2.17. 

Total capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.15; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Total capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.16; 
$1 billion-10 billion in assets: 0.73; 
$10 billion-50 billion in assets: 1.07; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.00. 

Tier 1 capital for leverage ratio; 
$ Billions; 
$500 million-1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.00; 
$10 billion-50 billion in assets: 0.99; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.01. 

Tier 1 capital for leverage ratio; 
% Assets; 
$500 million-1 billion in assets: 2.46; 
$1 billion-10 billion in assets: 0.36; 
$10 billion-50 billion in assets: 2.79; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.49. 

Depository institutions: 

Common equity tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Common equity tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 1.16; 
$1 billion-10 billion in assets: 4.36; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.21. 

Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.04; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Common equity tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.52; 
$1 billion-10 billion in assets: 2.40; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.52. 

Tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 1.44; 
$1 billion-10 billion in assets: 1.51; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.44. 

Tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.18; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.62; 
$1 billion-10 billion in assets: 1.16; 
$10 billion-50 billion in assets: 1.52; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.60. 

Total capital; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Total capital; 
% Assets; 
$500 million-1 billion in assets: 1.39; 
$1 billion-10 billion in assets: 1.94; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.42. 

Total capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.07; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Total capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 1.23; 
$1 billion-10 billion in assets: 0.83; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 1.21. 

Tier 1 capital for leverage ratio; 
$ Billions; 
$500 million-1 billion in assets: less than 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: less than 0.01. 

Tier 1 capital for leverage ratio; 
% Assets; 
$500 million-1 billion in assets: 1.23; 
$1 billion-10 billion in assets: 2.18; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 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 Depository institutions 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 Depository institutions 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. 

[End of table] 

For each capital ratio, we also calculated the total capital shortfall 
for all Depository institutions and depository institutions with 
insufficient capital in billions of dollars and as a percentage of the 
total assets of all the Depository institutions and depository 
institutions we analyzed. Our estimates are presented in table 10. 

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 Depository institutions combined: 

Common equity tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: 0.56; 
$1 billion-10 billion in assets: 0.72; 
$10 billion-50 billion in assets: 1.59; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 2.86. 

Common equity tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 0.16; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.16; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.02. 

Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 1.00; 
$1 billion-10 billion in assets: 1.48; 
$10 billion-50 billion in assets: 2.24; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 4.73. 

Common equity tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 0.28; 
$1 billion-10 billion in assets: 0.13; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.03. 

Tier 1 capital; 
$ Billions; 
$500 million-1 billion in assets: 0.48; 
$1 billion-10 billion in assets: 0.28; 
$10 billion-50 billion in assets: 1.93; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 2.69. 

Tier 1 capital; 
% Assets; 
$500 million-1 billion in assets: 0.13; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.19; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.02. 

Tier 1 capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 1.04; 
$1 billion-10 billion in assets: 1.17; 
$10 billion-50 billion in assets: 2.76; 
$50 billion or more in assets, not advanced approaches: 0.01; 
$50 billion or more in assets, advanced approaches: 0.02; 
Total: 5.00. 

Tier 1 capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 0.29; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: 0.27; 
$50 billion or more in assets, not advanced approaches: less than 0.01; 
$50 billion or more in assets, advanced approaches: less than 0.01; 
Total: 0.03. 

Total capital; 
$ Billions; 
$500 million-1 billion in assets: 0.43; 
$1 billion-10 billion in assets: 0.20; 
$10 billion-50 billion in assets: 2.20; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 2.84. 

Total capital; 
% Assets; 
$500 million-1 billion in assets: 0.12; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.02. 

Total capital plus capital conservation buffer; 
$ Billions; 
$500 million-1 billion in assets: 1.04; 
$1 billion-10 billion in assets: 1.25; 
$10 billion-50 billion in assets: 3.13; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 5.42. 

Total capital plus capital conservation buffer; 
% Assets; 
$500 million-1 billion in assets: 0.29; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: 0.31; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.03. 

Tier 1 capital for leverage Ratio; 
$ Billions; 
$500 million-1 billion in assets: 0.40; 
$1 billion-10 billion in assets: 0.20; 
$10 billion-50 billion in assets: 1.97; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 2.57. 

Tier 1 capital for leverage Ratio; 
% Assets; 
$500 million-1 billion in assets: 0.11; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0.19; 
$50 billion or more in assets, not advanced approaches: 0; 
$50 billion or more in assets, advanced approaches: 0; 
Total: 0.02. 

Depository institutions: 

Total estimated additional capital needed to meet Basel III minimum 
capital ratio for all depository institutions combined: 

Common equity tier 1 capital; 
$ Billions; 
Less than $1 billion in assets: 0.18; 
$1 billion-10 billion in assets: 0.22; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.40. 

Common equity tier 1 capital; 
% Assets; 
Less than $1 billion in assets: 0.01; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: less than 0.01. 

Common equity tier 1 capital plus capital conservation buffer; 
$ Billions; 
Less than $1 billion in assets: 0.49; 
$1 billion-10 billion in assets: 0.27; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.76. 

Common equity tier 1 capital plus capital conservation buffer; 
% Assets; 
Less than $1 billion in assets: 0.04; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.01. 

Tier 1 capital; 
$ Billions; 
Less than $1 billion in assets: 0.24; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.26. 

Tier 1 capital; 
% Assets; 
Less than $1 billion in assets: 0.02; 
$1 billion-10 billion in assets: less than 0.01; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: less than 0.01. 

Tier 1 capital plus capital conservation buffer; 
$ Billions; 
Less than $1 billion in assets: 0.66; 
$1 billion-10 billion in assets: 0.21; 
$10 billion-50 billion in assets: 0.18; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 1.05. 

Tier 1 capital plus capital conservation buffer; 
% Assets; 
Less than $1 billion in assets: 0.05; 
$1 billion-10 billion in assets: 0.01; 
$10 billion-50 billion in assets: 0.01; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.01. 

Total capital; 
$ Billions; 
Less than $1 billion in assets: 0.34; 
$1 billion-10 billion in assets: 0.22; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.56. 

Total capital; 
% Assets; 
Less than $1 billion in assets: 0.02; 
$1 billion-10 billion in assets: 0.01; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: less than 0.01. 

Total capital plus capital conservation buffer; 
$ Billions; 
Less than $1 billion in assets: 0.88; 
$1 billion-10 billion in assets: 0.54; 
$10 billion-50 billion in assets: 0.14; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 1.57. 

Total capital plus capital conservation buffer; 
% Assets; 
Less than $1 billion in assets: 0.06; 
$1 billion-10 billion in assets: 0.04; 
$10 billion-50 billion in assets: 0.01; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.01. 

Tier 1 capital for leverage ratio; 
$ Billions; 
Less than $1 billion in assets: 0.18; 
$1 billion-10 billion in assets: 0.02; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: 0.21. 

Tier 1 capital for leverage ratio; 
% Assets; 
Less than $1 billion in assets: 0.01; 
$1 billion-10 billion in assets: less than 0.01; 
$10 billion-50 billion in assets: 0; 
$50 billion or more in assets: 0; 
Subsidiaries of advanced approaches holding companies: 0; 
Total: less than 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 Depository institutions 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 
Depository institutions and depository institutions with insufficient 
capital in billions of dollars and as a percentage of the total assets 
of all Depository institutions and depository institutions. 

[End of table] 

Analysis of Funding Cost Associated with the Capital Shortfall: 

For Depository institutions 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.[Footnote 83] 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 Depository 
institutions 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: 

Median return on equity for all Depository institutions (%); 
$500 million-1 billion in assets: 8.13; 
$1 billion-10 billion in assets: 8.57; 
$10 billion-50 billion in assets: 8.11; 
$50 billion or more in assets, not advanced approaches: 7.89; 
$50 billion or more in assets, advanced approaches: 9.16; 
All: 8.30. 

Median interest rate on debt for all Depository institutions (%); 
$500 million-1 billion in assets: 0.64; 
$1 billion-10 billion in assets: 0.54; 
$10 billion-50 billion in assets: 0.43; 
$50 billion or more in assets, not advanced approaches: 0.47; 
$50 billion or more in assets, advanced approaches: 0.56; 
All: 0.60. 

Corporate income tax rate (%); 
$500 million-1 billion in assets: 35; 
$1 billion-10 billion in assets: 35; 
$10 billion-50 billion in assets: 35; 
$50 billion or more in assets, not advanced approaches: 35; 
$50 billion or more in assets, advanced approaches: 35; 
All: 35. 

Estimated change in funding cost associated with a 1 percentage point 
increase in ratio of equity capital to assets (percentage points); 
$500 million-1 billion in assets: 0.08; 
$1 billion-10 billion in assets: 0.08; 
$10 billion-50 billion in assets: 0.08; 
$50 billion or more in assets, not advanced approaches: 0.08; 
$50 billion or more in assets, advanced approaches: 0.09; 
All: 0.08. 

Depository institutions: 

Median return on equity for all depository institutions (%); 
Less than $1 billion in assets: 7.45; 
$1 billion-10 billion in assets: 8.19; 
$10 billion-50 billion in assets: 7.98; 
$50 billion or more in assets: 8.24; 
Subsidiaries of advanced approaches holding companies: 8.20; 
All: 7.56. 

Median interest rate on debt for depository institutions (%); 
Less than $1 billion in assets: 0.58; 
$1 billion-10 billion in assets: 0.49; 
$10 billion-50 billion in assets: 0.42; 
$50 billion or more in assets: 0.36; 
Subsidiaries of advanced approaches holding companies: 0.22; 
All: 0.57. 

Corporate income tax rate (%); 
Less than $1 billion in assets: 35; 
$1 billion-10 billion in assets: 35; 
$10 billion-50 billion in assets: 35; 
$50 billion or more in assets: 35; 
Subsidiaries of advanced approaches holding companies: 35; 
All: 35. 

Estimated change in funding cost associated with a 1 percentage point 
increase in ratio of equity capital to assets (percentage points); 
Less than $1 billion in assets: 0.07; 
$1 billion-10 billion in assets: 0.08; 
$10 billion-50 billion in assets: 0.08; 
$50 billion or more in assets: 0.08; 
Subsidiaries of advanced approaches holding companies: 0.08; 
All: 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 interest-bearing 
liabilities) for each group of Depository institutions and depository 
institutions for the first quarter of 2014, and we assumed that the 
marginal corporate income tax rate equaled 35 percent. 

[End of table] 

For Depository institutions 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 Depository 
institutions with estimated capital ratio less than Basel III minimum: 

Common equity tier 1 capital; 
$500 million-1 billion in assets: 0.26; 
$1 billion-10 billion in assets: 0.23; 
$10 billion-50 billion in assets: 0.35; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.26. 

Common equity tier 1 capital plus capital conservation buffer; 
$500 million-1 billion in assets: 0.14; 
$1 billion-10 billion in assets: 0.12; 
$10 billion-50 billion in assets: 0.27; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.13. 

Tier 1 capital; 
$500 million-1 billion in assets: 0.17; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.10. 

Tier 1 capital plus capital conservation buffer; 
$500 million-1 billion in assets: 0.12; 
$1 billion-10 billion in assets: 0.05; 
$10 billion-50 billion in assets: 0.07; 
$50 billion or more in assets, not advanced approaches: less than 0.01; 
$50 billion or more in assets, advanced approaches: less than 0.01; 
All: 0.08. 

Total capital; 
$500 million-1 billion in assets: 0.19; 
$1 billion-10 billion in assets: 0.11; 
$10 billion-50 billion in assets: 0.49; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.17. 

Total capital plus capital conservation buffer; 
$500 million-1 billion in assets: 0.09; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.08; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 0.08. 

Tier 1 capital for leverage ratio; 
$500 million-1 billion in assets: 0.19; 
$1 billion-10 billion in assets: 0.03; 
$10 billion-50 billion in assets: 0.22; 
$50 billion or more in assets, not advanced approaches: [Empty]; 
$50 billion or more in assets, advanced approaches: [Empty]; 
All: 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: 

Common equity tier 1 capital; 
Less than $1 billion in assets: 0.08; 
$1 billion-10 billion in assets: 0.34; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.09. 

Common equity tier 1 capital plus capital conservation buffer; 
Less than $1 billion in assets: 0.11; 
$1 billion-10 billion in assets: 0.19; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.11. 

Tier 1 capital; 
Less than $1 billion in assets: 0.10; 
$1 billion-10 billion in assets: 0.12; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.10. 

Tier 1 capital plus capital conservation buffer; 
Less than $1 billion in assets: 0.11; 
$1 billion-10 billion in assets: 0.09; 
$10 billion-50 billion in assets: 0.12; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.12. 

Total capital; 
Less than $1 billion in assets: 0.10; 
$1 billion-10 billion in assets: 0.15; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.10. 

Total capital plus capital conservation buffer; 
Less than $1 billion in assets: 0.09; 
$1 billion-10 billion in assets: 0.06; 
$10 billion-50 billion in assets: 0.02; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 0.09. 

Tier 1 capital for leverage ratio; 
Less than $1 billion in assets: 0.09; 
$1 billion-10 billion in assets: 0.17; 
$10 billion-50 billion in assets: [Empty]; 
$50 billion or more in assets: [Empty]; 
Subsidiaries of advanced approaches holding companies: [Empty]; 
All: 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 interest-bearing 
liabilities) for each group of Depository institutions 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 Depository institutions 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. 

[End of table] 

[End of section] 

Appendix III: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Lawrance L. Evans, (202) 512-8678 or evansl@gao.gov: 

Staff Acknowledgments: 

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. 

[End of section] 

Bibliography: 

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). 

Martýn-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). 

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). 

[End of section] 

Footnotes: 

[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 Depository institutions. 

[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. 

[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. 

[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). 

[6] In November 2013, the Financial Stability Board published its 
updated annual list of G-SIBs, 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. 

[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 
Depository institutions 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, 
[hyperlink, http://www.gao.gov/products/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). 

[10] Market 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). 

[11] See Basel Committee on Banking Supervision, Basel II: 
International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework (Basel, Switzerland: June 2004). 

[12] Before 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. 

[13] Revisions 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. 

[14] See 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). 

[15] Liquid 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. 

[16] A 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. 

[17] 78 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 Depository institutions 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 Depository institutions 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 Depository institutions subject to 
the Small Bank Holding Company Policy Statement. 12 U.S.C. § 
5371(b)(5)(C). 

[19] Exempt 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. 

[20] The 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. 

[21] Accumulated 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 special-purpose 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. 

[22] See [hypertlink, 
https://www.fdic.gov/news/news/press/2012/pr12054a.pdf] (guidance on 
stress testing expectation for community banks). 

[23] Because 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. 

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

[25] We identified the advanced approaches banking organizations using 
Form 10-K filings and other publicly available information. 

[26] For a more detailed analysis of the minimum Basel III capital 
ratios presented throughout this section, see appendix II. 

[27] For 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). 

[28] Funding 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 risk-premiums demanded 
by an institution's investors to decline sufficiently. 

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

[30] At the median return on equity and interest rate on debt for all 
Depository institutions 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. 

[31] For 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. 

[32] Anat 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). 

[33] See 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. 

[34] Malcolm 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. 

[35] Cosimano and Hakura, 31. 

[36] The 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. 

[37] Baker and Wurgler, 26. 

[38] Baker 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, Martýn-
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. 

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

[40] Roger and Vitek, 7, and Slovik and Cournede, 8. 

[41] Cosimano and Hakura, 30, and Corbae and D'Erasmo, 44. 

[42] Countries 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. 

[43] Ce??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). 

[44] Cosimano and Hakura, 30 and Corbae and D'Erasmo, 44. 

[45] Cosimano and Hakura, 30. 

[46] In 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, [hyperlink, http://www.gao.gov/products/GAO-12-237] 
(Washington, D.C.: Jan. 18, 2012). 

[47] The 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 [hyperlink, http://www.gao.gov/products/GAO-12-237]. For 
information on the loan pricing model, see appendix II. 

[48] The Federal Reserve's program, Comprehensive Capital Analysis and 
Review, implements its capital plan rule. 

[49] Mortgage 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. 

[50] The 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). 

[51] In the United States, the Basel III leverage ratio is referred to 
as the supplementary leverage ratio. 

[52] Regulator-approved bank models are internal models that banks use 
to determine risk-weighting of assets. 

[53] RCAP 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. 

[54] Jurisdictional 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). 

[55] A 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. 

[56] Assessment 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. 

[57] See 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). 

[58] See 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). 

[59] Wayne 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). 

[60] Basel 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. 

[61] The 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. 

[62] The 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. 

[63] Mark Carney, Chairman, Financial Stability Board, "Financial 
Reforms-Progress and Challenges," letter of February 17, 2014, to the 
G20 Finance Ministers and Central Bank Governors. 

[64] Several 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, [hyperlink, 
http://www.gao.gov/products/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. 

[65] A 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. 

[66] Federal 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 Depository institutions 
and Foreign Banking Organizations. 79 Fed. Reg. 17240, 17245 (March 
27, 2014). 

[67] 79 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). 

[68] Nonetheless, 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). 

[69] 79 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. 

[70] U.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. 

[71] In 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 Depository institutions. 79 Fed. 
Reg. 17240, 17277. 

[72] This 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. 

[73] Following 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. 

[74] Under 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. 

[75] See GAO, Risk-Based Capital: New Basel II Rules Reduced Certain 
Competitive Concerns, but Bank Regulators Should Address Remaining 
Uncertainties, [hyperlink, http://www.gao.gov/products/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, [hyperlink, 
http://www.gao.gov/products/GAO-07-253] (Washington, D.C.: Feb. 15, 
2007). 

[76] Raising capital standards above minimum requirements is sometimes 
described as "super-equivalence" or "gold plating." 

[77] Prompt Corrective Action requires regulators to classify banks 
into one of five capital categories and take increasingly severe 
actions as a bank's capital deteriorates. 

[78] See, 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). 

[79] As 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. 

[80] 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 [hyperlink, http://www.gao.gov/products/GAO-12-237]. 

[81] 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 [hyperlink, 
http://www.gao.gov/products/GAO-12-237]. 

[82] 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). 

[83] 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 risk-premiums demanded by an 
institution's investors to decline sufficiently. 

[End of section] 

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