Benefits and Costs of Bank Capital
Staff Discussion Notes, March 3, 2016
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- Benefits and Costs of Bank Capital
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Bibliographic details
- Authors: Jihad Dagher, Giovanni Dell'Ariccia, Luc Laeven, Lev Ratnovski, Hui Tong
- Published: March 3, 2016
- Series: Staff Discussion Notes
- DOI: https://doi.org/10.5089/9781498387712.006
Summary and purpose
- The paper examines how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations of banks in past banking crises.
- It also reviews evidence on the welfare costs of tighter capital regulation by assessing potential impacts on bank credit and lending rates.
- Findings broadly support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks.
Key findings
- The appropriate level of bank capital and a bank’s capacity to absorb losses is central to post-crisis policy debates.
- Empirical analysis focuses on the capital that would have been required to prevent creditor losses and public recapitalizations in past banking crises.
- Review of the literature on welfare costs suggests tighter capital regulation has potential effects on bank credit and lending rates; these costs are evaluated against benefits of loss absorbency.
- Conclusion: evidence broadly supports the FSB and Basel Committee loss-absorbency range for systemically important banks.
Policy implications
- Strengthening bank capital to the range suggested by the FSB and the Basel Committee is consistent with the paper’s findings on loss absorbency.
- Policymakers should weigh the welfare costs from potential reductions in bank credit or increases in lending rates against the benefits of reduced need for creditor losses or public recapitalizations.
Content in this bundle
- Benefits and Costs of Bank Capital; IMF Staff Discussion Note No. 16/04, March 2016