Bank Capital Regulation: Theory, Empirics, and Policy

Shekhar Aiyar, Charles Calomiris and Tomasz Wieladek

IMF Economic Review, 2015, vol. 63, issue 4, 955-983

Abstract: Minimum equity ratio requirements promote bank stability, but compliance must be measured credibly and requirements must be commensurate with risk. A mix of higher book equity requirements, a carefully designed contingent capital requirement, cash reserve requirements, and other measures, would address prudential objectives better than book equity requirements alone. Basel III’s ill-defined liquidity ratios, book capital ratios, and internal models of risk must be replaced by a system of credible, incentive-robust rules that combine valid concepts with objective, market-based information into a simplified and credible regulatory process. Raising minimum capital requirements will not be socially costless; bank profitability, share prices, and loan supply are likely to suffer. But avoiding the dramatic consequences of banking crises would more than repay those costs.

Date: 2015
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