Benefits and Costs of Bank Capital

IMF Staff Discussion Note No. SDN/16/04

38 Pages Posted: 14 Sep 2016

See all articles by Jihad C. Dagher

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department; Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Lev Ratnovski

International Monetary Fund

Hui Tong

International Monetary Fund (IMF)

Date Written: September 1, 2016

Abstract

We find that capital in the range of 15–23 percent of risk-weighted assets would have been sufficient to absorb losses in the vast majority of historic banking crises in advanced economies. Further capital increases would have had only marginal effects on preventing additional crises. Appropriate capital requirements may be somewhat below this range, as banks tend to hold capital in excess of regulatory minima, and other bail-in-able instruments can contribute to loss absorption capacity. While long-term social costs associated with this level of capital appear acceptable, the short-term costs of transitioning to higher bank capital may be substantial, which calls for a careful timing of such transition.

Keywords: Banks, Capital Regulation, Crises

JEL Classification: G01, G21, G28

Suggested Citation

Dagher, Jihad C. and Dell'Ariccia, Giovanni and Laeven, Luc A. and Ratnovski, Lev and Tong, Hui, Benefits and Costs of Bank Capital (September 1, 2016). IMF Staff Discussion Note No. SDN/16/04. Available at SSRN: https://ssrn.com/abstract=2838437

Jihad C. Dagher

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Giovanni Dell'Ariccia

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States
202-623-8135 (Phone)
202-623-4352 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Lev Ratnovski (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States
+1 202 623 8213 (Phone)

HOME PAGE: http://ratnovski.googlepages.com

Hui Tong

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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