An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the Us

Abstract

We evaluate the economic costs and benefits for bank capital levels in the United States. The framework and analysis is similar to that found in previous studies though we tailor the analysis to the specific features and experience of the U.S. financial system and account for the impact of new financial regulations. The conceptual framework identifies the benefits of bank capital with a lower probability of financial crises, which result in decreased economic output. The costs of bank capital are identified with increases in banks cost of funding, which are passed along to borrowers and result in a lower level of economic output. Optimal capital maximize the difference between benefits and costs or net benefits. Using a range of empirical estimates of net benefits we find that the optimal level of bank capital in the United States ranges from just over 13 percent to over 26 percent.

JEL Classification: E6, G21