Capital Requirements and Shifts in Commercial Bank Portfolios

A dramatic and virtually unprecedented shift in the portfolio structure of U.S. commercial banks has taken place since 1989. Specifically, government securities as a share of total loans has risen from 15 percent in 1989 to more than 22 percent today. This portfolio shift has coincided with an important change in the financial regulatory structure. Bank regulators around the world agreed to a common set of risk-based capital requirements in mid-1988. These requirements were phased in gradually in the United States and became fully effective this year. Some have suggested a connection between the regulatory changes and the portfolio shift, although this claim has not been substantiated. In this paper, we will present some rather strong evidence that the portfolio shift is consistent with regulatory change, which has increased the attractiveness of government securities as an asset. The evidence comes from an examination of the quarterly "call report" data on commercial banks from the Federal Financial Institutions Examination Council (FFIEC).