Bank Capital Requirements: Why, How High, Increasing them, Alternatives?

Abstract

Capital requirements are one of the prime tools wielded by policymakers in the banking sector. In this SFI Public Discussion Note, Prof. Steven Ongena, SFI Senior Chair and Professor of Banking at the University of Zurich, and Prof. Simona Nistor, Associate Professor in Banking at the Babeș-Bolyai University of Cluj-Napoca, discuss the raison d'être for these requirements, how they are currently implemented, what the consequences may be of increasing them, and what alternative tools policymakers could use to reach their objectives. The authors conduct a thorough review of the academic literature, highlighting both well-established theoretical models and empirical findings, while also identifying ongoing fields of research. They present the underlying mechanisms of capital requirements from both micro and macro perspectives. Furthermore, they differentiate between their static and dynamic dimensions, providing examples and referencing relevant literature throughout.