The procyclical application of bank capital requirements

Capital requirements have long been considered important to bank safety and the protection of the federal deposit insurance fund. But widespread banking problems and heavy losses to the deposit insurance fund have intensified the focus on capital. Supervisory agencies have become even more rigorous in applying and enforcing capital standards, imposing higher requirements on damaged banks. Furthermore, capital requirements have taken on greater significance as a result of a key provision of the recently enacted banking legislation, the Federal Deposit Insurance Corporation Improvement Act of 1991, which links various supervisory actions to deteriorating capital ratios in troubled institutions.