Gabilondo: The rise of risk-based regulatory capital – liquidity and solvency standards for financial intermediaries

From the Introduction:

In a capitalist economy, a private firm seeking finance must negotiate with prospective investors in the open market, which establishes standards about the terms on which debt and equity investment will be forthcoming. In addition to these market-financing standards, the capital structure of some financial firms—particularly broker-dealers, federally insured depository institutions, and insurance companies—must satisfy other requirements imposed by federal or state regulators to promote liquidity and solvency. Regulators take a heightened interest in these firms because they serve a public function in providing credit and other financial services. To grasp what regulatory capital rules try to accomplish, the reader must make a conceptual shift to see these financial firms as highly leveraged borrowers, contending with the demands of their own creditors. From this perspective, the financial stability of these firms becomes a matter of public concern.

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