Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views

42 Pages Posted: 9 Jun 2020

See all articles by Gene Ambrocio

Gene Ambrocio

Bank of Finland

Iftekhar Hasan

Fordham University ; Bank of Finland; University of Sydney

Esa Jokivuolle

Bank of Finland, Research Unit

Kim Ristolainen

University of Turku

Date Written: June 2, 2020

Abstract

We survey 149 leading academic researchers on bank capital regulation. The median (average) respondent prefers a 10% (15%) minimum non-risk-weighted equity-to-assets ratio, which is considerably higher than the current requirement. North Americans prefer a significantly higher equity-to-assets ratio than Europeans. We find substantial support for the new forms of regulation introduced in Basel III, such as liquidity requirements. Views are most dispersed regarding the use of hybrid assets and bail-inable debt in capital regulation. 70% of experts would support an additional market-based capital requirement. When investigating factors driving capital requirement preferences, we find that the typical expert believes a five percentage points increase in capital requirements would “probably decrease” both the likelihood and social cost of a crisis with “minimal to no change” to loan volumes and economic activity. The best predictor of capital requirement preference is how strongly an expert believes that higher capital requirements would increase the cost of bank lending.

Keywords: Bank regulation, capital requirements, expert survey

JEL Classification: G01, G28

Suggested Citation

Ambrocio, Gene and Hasan, Iftekhar and Jokivuolle, Esa and Ristolainen, Kim, Are Bank Capital Requirements Optimally Set? Evidence from Researchers’ Views (June 2, 2020). Bank of Finland Research Discussion Paper No. 10/2020, Available at SSRN: https://ssrn.com/abstract=3623209

Gene Ambrocio (Contact Author)

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

Iftekhar Hasan

Fordham University ( email )

45 COLUMBUS AVENUE
GBA-5TH FLOOR
NEW YORK, NY 10023
United States

Bank of Finland ( email )

P.O. Box 160
Helsinki 00101
Finland

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Esa Jokivuolle

Bank of Finland, Research Unit ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 10 831 2309 (Phone)

HOME PAGE: http://www.bof.fi/en/suomen_pankki/organisaatio/asiantuntijoita/jokivuolle_esa/

Kim Ristolainen

University of Turku ( email )

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