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.
In this summary, you will learn
- Why banks need adequate amounts of capital,
- What level of capital minimizes the impact of banking crises and
- What level of reserves can ensure that a bank avoids public injections of money in a crisis.
About the Authors
Jihad Dagher et al. are economists with the International Monetary Fund’s research department.