Literature review on the costs and benefits of bank capital published by the Basel Committee

As part of its work programme for evaluating the impact of its post-crisis reforms, the Basel Committee on Banking Supervision today published a working paper reviewing the literature on the costs and benefits of bank capital. The Committee published an earlier assessment of the long-term economic impact (LEI) of stronger capital and liquidity requirements in 2010.

Today's paper considers this assessment in light of estimates from later studies of the macroeconomic benefits and costs of higher capital requirements. Consistent with the Committee's original assessment, the paper finds that the net macroeconomic benefits of capital requirements are positive over a wide range of capital levels. Under certain assumptions, the literature finds that the net benefits of higher capital requirements may have been understated in the original Committee assessment. Put differently, the range of estimates for the theoretically-optimal level of capital requirements - where marginal benefits equal marginal costs - is likely either similar or higher than was originally estimated by the Basel Committee. The literature review highlights the important assumptions and caveats that need to be considered when assessing studies of optimal bank capital ratios.

Notes to editors

The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Committee reports to the Group of Central Bank Governors and Heads of Supervision and seeks its endorsement for major decisions. The Committee does not possess any formal supranational authority and its decisions do not have legal force. Rather, the Committee relies on its members' commitments to achieve its mandate. The Basel Committee is chaired by Pablo Hernández de Cos, Governor of the Bank of Spain.