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Benefits and Costs of Higher Capital Requirements for Banks

Listed author(s):
  • William R. Cline

    ()

    (Peterson Institute for International Economics)

This study provides new estimates of the likely economic losses from banking crises. It also provides new estimates of the economic cost of increasing bank capital requirements, based on the author's earlier estimate (Cline 2015) of the empirical magnitude of the Modigliani-Miller effect in which higher capital reduces unit cost of equity capital. The study applies previous official estimates (BCBS 2010a) of the impact of higher capital on the probability of banking crises to derive a benefits curve for additional capital, which is highly nonlinear. The benefit and cost curves are examined to identify the socially optimal level of bank capital. This optimum is estimated at about 7 percent of total assets, with a more cautious alternative (75th percentile) at about 8 percent, corresponding to about 12 and 14 percent of riskweighted assets, respectively. These levels are, respectively, about one-fourth to one-half higher than the Basel III capital requirements for the large global systemically important banks (G-SIBs).

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File URL: https://piie.com/publications/working-papers/benefits-and-costs-higher-capital-requirements-banks
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Paper provided by Peterson Institute for International Economics in its series Working Paper Series with number WP16-6.

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Date of creation: Mar 2016
Handle: RePEc:iie:wpaper:wp16-6
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  1. Avinash Persaud, 2014. "Why Bail-In Securities Are Fool's Gold," Policy Briefs PB14-23, Peterson Institute for International Economics.
  2. Jihad Dagher & Giovanni Dell'Ariccia & Luc Laeven & Lev Ratnovski & Hui Tong, 2016. "Benefits and Costs of Bank Capital," IMF Staff Discussion Notes Staff Discussion Note No , International Monetary Fund.
  3. Charles W. Calomiris, 2013. "Reforming Banks Without Destroying Their Productivity and Value," Journal of Applied Corporate Finance, Morgan Stanley, vol. 25(4), pages 14-20, December.
  4. Anat Admati & Martin Hellwig, 2013. "The Bankers' New Clothes: What's Wrong with Banking and What to Do about It," Economics Books, Princeton University Press, edition 1, number 9929.
  5. Olivier J Blanchard & Eugenio M Cerutti & Lawrence Summers, 2015. "Inflation and Activity – Two Explorations and their Monetary Policy Implications," IMF Working Papers 15/230, International Monetary Fund.
  6. Ryo Kato & Shun Kobayashi & Yumi Saita, 2010. "Calibrating the Level of Capital: The Way We See It," Bank of Japan Working Paper Series 10-E-6, Bank of Japan.
  7. Rajan, Raghuram G & Zingales, Luigi, 1995. " What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
  8. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Using Market Information for Banking System Risk Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
  9. William R. Cline, 2015. "Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks," Working Paper Series WP15-8, Peterson Institute for International Economics.
  10. William R. Cline, 2014. "Managing the Euro Area Debt Crisis," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 6871, November.
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