The costs and benefits of bank capital requirements

Abstract

Since the immediate aftermath of the 2007–2009 financial crisis, several studies have produced estimates of the short-term and long-term impact of increases in bank regulatory capital on bank lending and real activity. As documented in BCBS (2016), earlier studies concluded that permanent and significant increases in capital requirements would result in relatively small declines in bank lending and modest declines in real activity. More recent studies have detected cases in which the short-term impact of increases in capital requirements may be large, but a gradual phasing-in of these requirements may spread their costs out evenly in the long-term. Importantly, most studies conclude that the long-term costs of higher capital requirements are lower than the benefits arising from their lowering the probability of banking crises with their attendant real costs…