Replenishing the Banking Sector: Managing Bank Capital in the Post‐Crisis World

In the wake of the current financial crisis, there is a renewed focus on capital adequacy in the banking sector. A combination of impending regulatory changes, evolving views on both the level and composition of capital, the need to manage capital to stress‐case scenarios, and the valuation implications of pro‐cyclical versus counter‐cyclical strategies will require banks to rethink their capital strategy in the postcrisis world. In this report, the authors (1) attempt to quantify the potential impact of further stresses on bank balance sheets and assess the magnitude of capital requirements for U.S. banks; (2) shed light on bank valuation dynamics; and (3) provide an analytical and empirical framework for measuring optimal equity capital buffers.