Basel III Shifted Risk Inside BHCs, Draining Nonbanks as Banks Built Capital
Updated
Updated · Liberty Street Economics - · Jul 17
Basel III Shifted Risk Inside BHCs, Draining Nonbanks as Banks Built Capital
3 articles · Updated · Liberty Street Economics - · Jul 17
Summary
2015 Basel III rules pushed bank holding companies to move equity from nonbank affiliates into bank subsidiaries, leaving banks safer but nonbanks with thinner capital buffers and riskier business models.
Bank subsidiaries raised capital ratios, improved asset quality and cut risk-weighted assets, while nonbanks paid more dividends upstream, increased intra-group balances and shifted toward more leveraged consumer lending.
A 5% loss on nonbank assets would force the average BHC to use about 18% of excess capital to recapitalize affiliates; at the 95th percentile, needs approach 100%, and more than 4% would exhaust buffers.
For the most exposed firms, even partial support for weakened nonbanks would erase more than 70% of the bank-side capital gain, and full support could leave them worse off than before the reallocation.
The study argues Basel III reduced risk at regulated banks but often relocated it within the same organization, suggesting regulators must assess capital and fragility across the whole holding company.