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Bank Capital: A Seawall Approach

Author

Listed:
  • Jihad Dagher

    (International Monetary Fund)

  • Giovanni Dell'Ariccia

    (International Monetary Fund and CEPR)

  • Luc Laeven

    (European Central Bank and CEPR)

  • Massimo Lev Ratnovski

    (International Monetary Fund and CEPR)

  • Massimo Hui Tong

    (International Monetary Fund)

Abstract

We find that bank capital in the range of 15-23 percent of risk-weighted assets would have been sufficient to absorb losses in the vast majority of historic banking crises in advanced economies. Further capital increases would have had only marginal effects on preventing additional crises. Appropriate capital requirements may be below this range, as banks tend to hold capital in excess of regulatory minimums, and other bail-in-able instruments can contribute to banks' loss-absorption capacity. While the long-term social costs associated with this level of capital appear acceptable, the short-term costs of transitioning to higher bank capital may be substantial, which calls for a careful timing of such transition.

Suggested Citation

  • Jihad Dagher & Giovanni Dell'Ariccia & Luc Laeven & Massimo Lev Ratnovski & Massimo Hui Tong, 2020. "Bank Capital: A Seawall Approach," International Journal of Central Banking, International Journal of Central Banking, vol. 16(2), pages 249-291, March.
    • Handle: RePEc:ijc:ijcjou:y:2020:q:1:a:7
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    Citations

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    Cited by:

    1. Luis Garcia & Ulf Lewrick & Taja Sečnik, 2023. "Window Dressing and the Designation of Global Systemically Important Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 64(2), pages 231-264, October.
    2. Fang, Xiang & Jutrsa, David & Peria, Soledad Martinez & Presbitero, Andrea F. & Ratnovski, Lev, 2022. "Bank capital requirements and lending in emerging markets: The role of bank characteristics and economic conditions," Journal of Banking & Finance, Elsevier, vol. 135(C).
    3. Kabundi, Alain & De Simone, Francisco Nadal, 2022. "Euro area banking and monetary policy shocks in the QE era," Journal of Financial Stability, Elsevier, vol. 63(C).
    4. Pierre Durand & Gaëtan Le Quang & Arnold Vialfont, 2023. "Are Basel III requirements up to the task? Evidence from bankruptcy prediction models," Working Papers 2308, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    5. Irena Pyka & Aleksandra Nocoń, 2021. "Bank Risk Capital and Its Effectiveness in Selected Euro Area Banking Sectors," JRFM, MDPI, vol. 14(11), pages 1-18, November.
    6. König, Philipp Johann & Laux, Christian & Pothier, David, 2021. "The leverage effect of bank disclosures," Discussion Papers 31/2021, Deutsche Bundesbank.
    7. Laeven, Luc & Maddaloni, Angela & Mendicino, Caterina, 2022. "Monetary policy, macroprudential policy and financial stability," Working Paper Series 2647, European Central Bank.
    8. Nguyen, Thanh Cong, 2021. "Economic policy uncertainty and bank stability: Does bank regulation and supervision matter in major European economies?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 74(C).
    9. Luis Garcia & Ulf Lewrick & Taja Sečnik, 2021. "Is window dressing by banks systemically important?," BIS Working Papers 960, Bank for International Settlements.

    More about this item

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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