Capital/assets ratios in banking declined substantially during the two world wars. Three drivers severely impacted the capitalisation of banks. Banks invested heavily in government debt, which led to an expansion of balance sheets. High inflation ratios devalued the paid-up capital of banks. Moreover, formal and informal constraints restricted banks from issuing capital in wartime. The Second World War, in particular, had long-lasting effects on the evolution bank capital. The United Kingdom controlled capital issuances after 1939 and reinforced the financial repression of banks. The Swiss Banks operated in a regulated but much more liberal framework. In the United States, the belief in informal capital requirement guidelines was very pronounced. By the mid-1930s, the United States had already three federal bank supervisory agencies, which all had developed opinions on how capital adequacy was assessed. However, the rapidly growing government debt in banks’ balance sheets overturned these conventions, leading to the first risk-adjusted measurements for capital and triggering the development of new measurement approaches that became the forerunner of the Basel I guidelines.

The epilogue covers the development from Basel I to III and reflections on the evolution of capital regulation in the long run. Particular emphasis is given to the divergence of risk-weighted and risk-unweighted capital ratios among large, global banks – most of which have their roots in the nineteenth century. The chapter calls for a fundamental reassessment of banking regulation. From a historical perspective, regulatory frameworks are highly path dependent and seldom fundamentally reconsidered, aiming to increase financial stability. Moreover, once we accept a certain degree of banking instability in modern banking, the focus should be on who covers losses and how significant such losses can potentially be without the involvement of the public.

A new data set shows the evolution of capital ratios for the United States, the United Kingdom, Switzerland, and Germany. The chapter questions the accuracy of capital/assets ratios and argues that cross-country comparisons of capital ratios are of little explanatory value without a historical narrative. Firstly, the capital/assets ratios used by the academic literature usually consider paid-up capital and disclosed reserves only. However, the total liability of shareholders can go beyond the paid-up capital (double or unlimited liability), which influences the level of capital/assets ratios. Secondly, accounting standards allowed the extensive build-up of hidden reserves in the United Kingdom and Switzerland. The chapter shows that the capital strength of banks, considering hidden reserves and shareholder liabilities, is underestimated. Existing publications comparing capital/assets ratios on an international level neglect such issues. Additionally, the chapter analyses structural changes in the assets of British, Swiss, and US banks using the Basel I framework of 1988 for a historical simulation.