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Benefits and Costs of Bank Capital
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Benefits and Costs of Bank Capital

Jihad Dagher, Giovanni Dell’Ariccia, Luc Laeven, Lev Ratnovski and Hui Tong
IMF, 2016
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Editorial Rating

7

Qualities

  • Analytical
  • Innovative

Recommendation

Banks need capital to help them withstand losses. Yet what constitutes an adequate level of reserves is a topic of heated discussion among bankers, regulators and policy makers. Lower buffers could leave systemically important banks at risk, while stringent requirements might unduly constrain credit availability and raise financing costs for businesses. This scholarly study from the International Monetary Fund examines a dynamic, complex question that cuts across regulatory remits and economic systems. getAbstract recommends it to bank executives and policy makers.

Take-Aways

  • Banks and regulators continue to debate the proper level of bank reserves that protects institutions and the financial system but that still affords businesses access to capital.
  • Research shows that, in advanced economies, capital in the range of 15%–23% of risk-weighted assets would have been enough to buffer losses in most past banking crises.
  • Capital increases need to happen gradually and allow for heterogeneity across banks.

About the Authors

Jihad Dagher, Giovanni Dell’Ariccia, Lev Ratnovski and Hui Tong are economists at the International Monetary Fund. Luc Laeven is director-general of research at the European Central Bank.

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