Summary of Bank Capital Redux

Looking for the article?
We have the summary! Get the key insights in just 5 minutes.

Bank Capital Redux  summary
Start getting smarter:
or see our plans

Rating

8 Overall

9 Importance

9 Innovation

7 Style


Recommendation

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.

In this summary, you will learn

  • Why banking regulators have turned to capital ratio controls to avert credit crises,
  • What empirical data reveal about this policy choice and
  • Why other banking metrics may be more accurate as predictive tools.
 

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. Three financial ratios are at the core of capital buffers and bank leverage prescriptions for financial institutions:


More on this topic

By the same authors

Macrofinancial History and the New Business Cycle Facts
Macrofinancial History and the New Business Cycle Facts
8

Customers who read this summary also read

How to Speak Money
How to Speak Money
8
Convergence in the European Union
Convergence in the European Union
7
The Forgotten History of the Financial Crisis
The Forgotten History of the Financial Crisis
9
Enhancing the Strategic Potential of Treasury
Enhancing the Strategic Potential of Treasury
7
What happened to global banking after the crisis?
What happened to global banking after the crisis?
7
Introducing a New Broad-Based Index of Financial Development
Introducing a New Broad-Based Index of Financial Development
7

Related Channels

Comment on this summary