Book Description

The global financial crisis produced an important agreement among regulators in 2010–11 to raise capital requirements for banks to protect them from insolvency in the event of another emergency. In this book, William R. Cline, a leading expert on the global financial system, employs sophisticated economic models to analyze whether these reforms, embodied in the Third Basel Accord, have gone far enough. He calculates how much higher bank capital reduces the risk of banking crises, providing a benefit to the economy. On the cost side, he estimates how much higher capital requirements raise the lending rate facing firms, reducing investment in plant and equipment and thus reducing output in the economy. Applying a plausible range of parameters, Cline arrives at estimates for the optimal level of equity capital relative to total bank assets. This study also challenges the recent "too much finance" literature, which holds that in advanced countries banking sectors are already too large and are curbing growth.

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Editorial Reviews

Cline ... concludes from both a careful review of the literature and his own cost-benefit analysis that capital levels should be even higher.

Daniel K. Tarullo, former member of the Federal Reserve Board

This book is a significant addition to the literature on optimal capital estimation, and should engage the attention of the Basel Committee and regulators.

Central Banking

Data Disclosure

The data underlying this analysis are available for download here [zip].




1 Overview

2 A Survey of Literature on Optimal Capital Requirements for Banks

3 Testing the Modigliani-Miller Theorem of Capital Structure Irrelevance for Banks

4 Benefits and Costs of Higher Capital Requirements for Banks

5 Total Loss-Absorbing Capacity for Large Banks 

6 A Critical Evaluation of the “Too Much Finance” Literature

7 Conclusions and Policy Implications



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