March 2020 issue contents
Bank Capital: A Seawall Approach

Jihad Daghera, Giovanni Dell'Aricciaa,c, Luc Laevenb,c, Lev Ratnovskia,b, and Hui Tonga

Abstract

We find that bank 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 below this range, as banks tend to hold capital in excess of regulatory minimums, and other bail-in-able instruments can contribute to banks' loss-absorption capacity. While the 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.


JEL Code: G20.

 
Full article (PDF, 43 pages, 819 kb)
Online appendix

 
a International Monetary Fund
b European Central Bank
c CEPR