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Capital Requirements For Banks Are Needed But Costly—Only Limited Increases Are Called For

William R., Cline, (2017), “Capital Requirements For Banks Are Needed But Costly—Only Limited Increases Are Called For”, PIIE, 12 Ιουνίου

Cline’s study, one of several analyses of financial stability published by PIIE since the crisis of 2008–09, reviews the extensive literature on banking crises, regulations, and their impact on capital formation and economic growth. It looks indepth at the multilateral voluntary framework on bank capital adequacy known as Basel III, established in 2010–11, which raised the amount of equity capital that banks must hold. The Basel III rules only require the largest banks to hold 9.5 percent of risk-weighted assets in equity capital. Cline calculates instead that equity capital should be 12 to 14 percent of risk-weighted assets, corresponding to 7 to 8 percent of total assets. While an increase, this assessment is in contrast to some academics’ calls for far higher bank capital, ranging from 15 to 25 percent of total assets.

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