William R. Cline, PIIE senior fellow, presented the findings of his latest book, The Right Balance for Banks: Theory and Evidence on Optimal Capital Requirements, at a launch event on June 12, 2017. Daniel Tarullo, former Federal Reserve governor, and Simon Johnson, the Ronald A. Kurtz (1954) Professor of Entrepreneurship at the MIT Sloan School of Management and PIIE nonresident senior fellow, provided commentary on the critical issues for banking stability and supervision.
In this book, Cline uses a fresh economic principles–based approach to determine whether banking regulations after the financial crisis have made banking systems sufficiently safe, and to quantitatively estimate what the cost-benefit tradeoff would be of buying greater insurance against financial crisis through raising capital requirements. While Cline finds that overall capital requirements for the major international banks under Basel III remain inadequate, he sees the point of diminishing returns to higher capital not far away. He derives his original estimates for the optimal level of equity capital relative to total bank assets, taking the costs into account, and argues that unduly high requirements for equity capital in banks would cause higher lending rates, less formation of capital stock throughout the economy, and therefore lower productive capacity—on a scale sufficient to be weighed against his assessment of the risk-weighted cost of financial crisis. These estimates for required capital are far lower than those of many widely-cited studies.
Cline has been affiliated with the Institute since 1981. He had previously taken leave from the Institute to be deputy managing director and chief economist of the Institute of International Finance from 1996–2001. He also formerly held a joint affiliation with the Center for Global Development.
Tarullo recently resigned from the Board of Governors of the Federal Reserve System, where he had served as a member since 2009 and represented the Federal Reserve in international and interagency forums on financial regulation issues. He was previously a professor of law at Georgetown University Law Center. In April this year, he served as distinguished fellow at MIT's Golub Center for Finance and Policy.
Johnson has been affiliated with PIIE since 2008. He is also the head of the Global Economics and Management group at the MIT Sloan School, a member of the Executive Personnel Committee, and chair of the Sloan Fellows MBA Program Committee. He cofounded and currently leads the Global Entrepreneurship Lab.