Summary of Capital Buffers

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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.

 

Summary

During the global financial crisis, the problems of distressed banks spilled over into the real economy. Losses associated with the real-estate-based assets of banks and other financial sector participants initially affected the United States, but the contagion soon spread to other advanced nations. ...

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