Summary of Bank Capital Redux

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In the advanced economies, financial regulators have targeted capital ratios as an effective tool for averting financial contagion and mitigating its negative impacts. As a result, officials have promulgated banking capital and leverage rules with substantially higher thresholds since the 2008 crisis. But economists Òscar Jordà, Björn Richter, Moritz Schularick and Alan M. Taylor push back on this reasoning by compiling a historical record of data to understand whether such measures can prevent credit shockwaves. getAbstract recommends this powerful report to finance professionals for its deep dive into the intricacies of financial sector engineering.

About the Authors

Òscar Jordà is an economist at the Federal Reserve Bank of San Francisco. Björn Richter and Moritz Schularick are economics professors at the University of Bonn. Alan M. Taylor is an economics professor at the University of California, Davis.

 

Summary

Policy makers, in picking up the economic pieces from the 2008 credit collapse and the subsequent global recession, turned to capital buffers and bank leverage constraints as a blueprint for averting future financial implosions and reducing their economic impact. Banking regulators have relied on increasing capital leverage ratios, based on the idea that “larger shock buffers should reduce both the probability and the cost of financial crises.” However, the historical data of 17 developed economies from 1870–2013 does not support this theory...


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