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Benefits and Costs of Bank Capital

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Benefits and Costs of Bank Capital

IMF,

5 min read
5 take-aways
Audio & text

What's inside?

The appropriate level of bank capital to absorb losses is a subject of unending debate.

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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.

Summary

Regulatory debate centers on whether banking reforms such as Basel III can adequately forestall future banking collapses or whether increased controls are punishing economic growth. Banks and their regulators continue to argue the appropriate level of capital reserves that protects institutions and the financial system but that still affords businesses access to capital. Capital that is sufficient to absorb bank losses should not be an absolute amount but rather a range that, ideally, lets systemically important banks avoid having to resort to taxpayer funding in times of crisis. Research shows that, in advanced economies...

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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