Benefits and Costs of Bank Capital

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.