Markus K Brunnermeier, Jean-Pierre Landau, 15 January 2020

Central banks have been called on to contribute to fighting climate change. This column presents a framework for thinking about the issue and identifies some major trade-offs and choices. It argues that climate should be a major part of risk assessments and that capital ratios could be used in a proactive way by applying favourable regimes to ‘green’ loans and investments. It also suggests that central banks may want to take several climate change-related aspects into account when designing and implementing monetary policies. However, the central bank should retain absolute discretion to interrupt any action if its first-priority objective – price stability – were to be compromised.

Òscar Jordà, Björn Richter, Moritz Schularick, Alan M. Taylor, 07 April 2017

Higher capital ratios are unlikely to prevent a financial crisis. This is empirically true both for the entire history of advanced economies from 1870 to 2013 and for the post-WW2 period, and holds both within and between countries. The authors of this column reach this conclusion using newly collected data on the liability side of banks’ balance sheets in 17 countries.  However, higher capital buffers have social benefits in terms of macro-stability: recoveries from financial crisis recessions are much quicker with higher bank capital. 

Lev Ratnovski, 28 July 2013

After much negotiation, Basel III regulations set capital requirements to be between 8% and 12%. This column suggests this may not be enough. It looks at how much capital banks would need to fully absorb asset shocks of the size seen in OECD countries over the last 50 years. The answer is 18% risk-weighted capital, corresponding to 9% leverage. This benchmark is highly conservative, so the true 'optimal' bank capital may be lower.

Sheila Bair, 09 June 2013

Does anybody have a clear vision of the desirable financial system of the future? This column has one. It gives simple answers to 12 simple questions panellists at a recent IMF conference failed to answer.

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