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Capital Buffers
Article

Capital Buffers

How much capital banks need is an important public policy question.

Jihad Dagher, Giovanni Dell’Ariccia, Lev Ratnovski and Hui Tong
Finance & Development Magazine, 2016
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Editorial Rating

8

Qualities

  • Innovative
  • Well Structured

Recommendation

It seems there can be too much of a good thing. After the global financial crisis, policy makers speculated whether they could have mandated a specific level of capital for banks that would have mitigated the crisis’s impact. Economists Jihad Dagher, Giovanni Dell’Ariccia, Lev Ratnovski and Hui Tong find that a higher capital requirement adds critical value up to a certain point, with diminishing returns beyond that. getAbstract suggests this succinct but informative article to regulators and bank executives still wrestling with how to ensure a safe financial system.

Take-Aways

  • A higher bank capital level serves to reassure a bank’s creditors and depositors that it can withstand any losses that arise.
  • Bank shareholders would prefer banks to hold a low reserve of capital, but that may not be in the best interests of society.
  • Data from past banking crises in developed countries reveal that a capital level beyond 15%–23% of a bank’s risk-weighted assets doesn’t provide much additional protection.

About the Authors

Jihad Dagher et al. are economists with the International Monetary Fund’s research department.

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