Are bank capital requirements optimally set? Evidence from researchers' views

Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle and Kim Ristolainen

No 10/2020, Bank of Finland Research Discussion Papers from Bank of Finland

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 (search for similar items in EconPapers)
JEL-codes: G01 G28 (search for similar items in EconPapers)
Date: 2020
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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