August 1997
Federal Reserve Bank of Dallas

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Are Capital Requirements Effective? A Cautionary Tale from Pre-Depression Texas
Jeffery W. Gunther, Linda M. Hooks and Kenneth J. Robinson

Capital requirements are now a primary ingredient in efforts to supervise and regulate the banking industry. Their main purpose is to protect the deposit insurance fund and to minimize taxpayer exposure should financial difficulties occur. Capital requirements are not new, however. Texas was one of the first states to institute formal capital requirements when it introduced a deposit insurance program early in the century. But this early attempt at capital regulation proved ineffective in preventing a complete breakdown of the deposit insurance system it was meant to protect. Using recently discovered examination data for Texas banks operating in the troubled 1920s, we show that the capital requirements were unsuccessful largely due to a reliance on book-value capital measures that overstated the true financial condition of banks. As some researchers have shown recently, the same types of problems confront current efforts to rely on measures of capital as the focus of banking supervision. This has led to recent proposals to restructure bank capital regulation, such as the precommitment approach.

Mexican Payments System Reforms
Sujit "Bob" Chakravorti

This article investigates the ongoing payments system reforms begun by the Bank of Mexico in 1994. The goals of these reforms are to reduce the amount of uncollateralized intraday credit extended by the Bank of Mexico (previously unlimited), to promote a market-based allocation of intraday credit for interbank payments, and to move large-value paper-based payments to electronic form. The Bank of Mexico has been successful in achieving all of these goals to some extent. But despite this progress, like other central banks around the world, the Bank of Mexico still faces the possibility that government guarantees may weaken market discipline in the payments system.