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Capital Buffers

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Capital Buffers

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

Finance & Development Magazine,

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Can there be too much of a good thing? When it comes to bank capital requirements, it seems so.

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8

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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.

Summary

During the global financial crisis, the problems of distressed banks spilled over into the real economy. Losses associated with the real-estate-based assets of banks and other financial sector participants initially affected the United States, but the contagion soon spread to other advanced nations. Governments had to pump large amounts of capital into their financial systems so that banks could satisfy their commitments and safeguard against insolvency. Some argue that a higher level of capital protects bank debtors and creditors, as well as society, from the real effects of severe bank stress. Having to hold more capital also...

About the Authors

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

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