Optimal Bank Capital

David Miles, Jing Yang and Gilberto Marcheggiano

No 8333, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs--however accurate--can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

Keywords: Cost of equity; Banks; Capital regulation; Capital structure; Leverage; Modigliani-miller (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2011-04
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Citations: View citations in EconPapers (50)

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Related works:
Journal Article: Optimal Bank Capital (2013)
Working Paper: Optimal Bank Capital (2011)
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