Discussion Paper

How Basel III Changes Where Capital Sits: Nonbank Subsidiaries as Equity Reservoirs

Abstract: When Basel III’s binding capital minimums took effect for U.S. banks in January 2015, a bank holding company (BHC) whose depository subsidiary fell short of the new standards had two options. It could raise fresh equity in external markets, a costly option. Or, if it owned equity-rich nonbank affiliates, it could simply move capital from one subsidiary to another. The second route satisfies the regulator, avoids issuance costs, and leaves consolidated equity exactly where it was. In this second post of our series, we show that this is precisely what organizationally complex BHCs did in response to higher capital requirements.

JEL Classification: G21; G23; G28; G38;

https://doi.org/10.59576/lse.20260716

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2026-07-16

Number: 20260716

Note: This post is the second in a three-part series on how bank regulation interacts with the organizational structure of banking firms. The first post documented that nonbank subsidiaries inside bank holding companies (BHCs) are large, equity-rich “reservoirs,” and that bank-level capital diverged sharply from consolidated capital after Basel III took effect in 2015. This post asks why, and traces the answer through the internal plumbing of the holding company. The series draws on the authors’ recent Staff Report, “Regulatory Arbitrage Within the Firm.”