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18 J. Banking Reg. 1 (2017)

handle is hein.journals/jlbkrg18 and id is 1 raw text is: Original Article Financial implications of transitioning to the Wall Street Reform and Consumer Protection Act of 2010 and Basel III William C. Handorf is a professor of finance with the George Washington University's School of Business located in Washington DC. He is also a director and vice chairman of the board of directors of the Federal Home Loan Bank of Atlanta, which is a $125 billion, SEC-registered wholesale institution. He is an ex officio member of the Bank's enterprise risk operations committee and the finance committee that reflect the focus of this article. The views are of the author not the Federal Home Loan Bank of Atlanta or the Federal Home Loan Bank System. Correspondence: William C. Handorf, The George Washington University, Funger Hall, 501 F, Washington DC 20052, USA ABSTRACT The Wall Street Reform and Consumer Protection Act of 2010 and Basel III have spawned many new regulatory rules related to capital, risk management and liquidity. Although the two regulatory initiatives are not fully aligned, they clearly require systemically important banks to increase funding by equity capital, commit more resources to short-term marketable securities (and long-term debt for Basel III) and enhance risk management procedures. This article empirically addresses how large US banks with assets exceeding US$50 billion changed asset/liability management between 2010 when the Act was enacted and 2014 when more restrictive rules emanating from the law and international regulation are phased in. The ana- lysis also evaluates how portfolio shifts positively and negatively impact share value, return on equity and return on assets. Journal of Banking Regulation (2017) 18, 1-13. doi:10.1057/jbr.2015.5; published online 1 April 2015 Keywords: banking; risk management; regulation INTRODUCTION Bank crises typically occur every 10-15 years in some area of the world. The underlying asset class and country experiencing numerous bank failures that require governmental assistance shift over time. Banks ultimately fail because of inadequate capital and/or a liquidity crisis. A few banks have been considered well-capita- lized and liquid, yet were closed by regulatory authorities given existence of fraud or money laundering, such as existed at the Bank of Credit and Commerce International in 1991 or United American Bank and related other institutions controlled by the Butcher brothers in Tennessee and Kentucky in 1983/1984. Capital ratios usually decline to very low or negative values given excessive losses on high- risk loans and, more recently, investment secu- rities. The loans and securities were under- written poorly and neither supported by adequate levels of loan loss reserves nor priced appropriately for risk. The problems are more pronounced when a bank lacks a diversified portfolio and concentrates in loans, securities or geographic regions experiencing greater than expected losses. Bank capital ratios also decline given excessive growth funded by high-cost, non-core deposits and borrowed money. Management must invest the proceeds of high- cost liabilities with high-yielding assets (that is, @ 2016 Macmillan Publishers Ltd. 1745-6452 Journal of Banking Regulation Vol. 18, 1, 1-13 www.palgrave.com/journals

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