A new expert survey on bank capital requirements

Gene Ambrocio, Iftekhar Hasan, Esa Jokivuolle, Kim Ristolainen 06 February 2019

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Since the crisis of 2007–2009, banks' equity capital requirements have been considerably increased. A relatively simple capital-to-assets (leverage ratio) requirement has been added to supplement risk-weighted capital requirements, and floors have been imposed on asset risk weights. Other new elements have also been introduced, such as a counter-cyclical adjustment to the minimum requirement, and systemically important banks have an extra requirement. Requirements on minimum loss-absorbing capacity have also been strengthened in many jurisdictions through the concept of bail-inable debt. All these reforms aim to reduce the likelihood of future crises.

The optimal level and form of capital requirements are still much debated in the literature. The research question centres on the trade-off between reducing the likelihood and costs of banking crises while possibly sacrificing access to credit and short-term economic growth. However, many factors play a role in determining the costs and benefits of banking regulation. The extensive literature on banking regulation has made a great deal of progress since the Global Crisis and has tackled many of these issues in turn.

A survey of recent research is provided in Haldane et al. (2018).1 Regarding whether the post-crisis reforms have resulted in a sufficiently safe level of capital requirements, the authors argue that much depends on how effective banks’ total loss-absorbing capacity (TLAC) would be as a complement to equity in absorbing losses in a systemic crisis. Others have argued for the importance of liquidity requirements. In practice, banks may find additional requirements and restrictions brought about by periodic stress testing and capital planning exercises will turn out to be the most binding restrictions. In addition, other macro-prudential tools have taken the form of borrower-based requirements such as limits on loan-to-value and loan-to-income.

How can we draw together all the new research results to guide a consistent and comprehensive future policy? Even if we focus on just one aspect of regulation – bank capital – a myriad of nuances and spillover effects from other forms of regulation complicate the issue. One way is to ask the leading academic experts in the field who are familiar with the literature but may also draw different conclusions from it, using their expert judgement.2

The Bank of Finland is launching such a survey in the week beginning 11 February 2019 with the aim of discovering the views of professional experts in economics and finance on how much capital banks should be holding and how, in broad terms, the regulatory requirements enforcing this should be designed. We will approach academics worldwide who are known to be active researchers and experts in the fields of banking and finance or macro-finance, preferably with experience or specialisation in questions of banking regulation. More information about the upcoming survey is available on the Bank of Finland website at https://www.suomenpankki.fi/bankcapitalsurvey.3

Given that bank capital regulation is a multi-dimensional problem and deeply interconnected with other aspects of banking regulation, the survey is designed to take these into account while striving to maintain clarity and sufficient simplicity.4 The survey will be conducted anonymously. We hope to publish the first results during the course of 2019. The survey has purely academic aims and is not directed at supporting any specific policy initiative. Nonetheless, we hope the results will also be informative for banking regulators at large. Going forward, we plan to discuss our results in the context of one of the future research conferences organised regularly by the Bank of Finland. In the future, it is also possible to have a follow-up survey and extend the survey to other interest groups.

References

Admati, A and M Hellwig (2013), The Banker’s New Clothes: What’s Wrong with Banking and What to Do about It, 1st ed, Princeton University Press.

Freixas, X, L Laeven and J-L Peydro (2015), Systemic Risk, Crises, and Macroprudential Regulation, MIT Press.

Haldane, A, D Aikman, M Hinterschweiger and S Kapadia (2018), “Rethinking financial stability”, Bank of England Staff Working Paper No. 712.

Kashyap, A, J Stein and S Hanson (2011), “A Macroprudential Approach to Financial Regulation”, Journal of Economic Perspectives 25(11): 3–28.

Endnotes

[1] See also Freixas et al. (2015), Admati and Hellwig (2013), and Kashyap et al. (2011).

[2] A survey could contribute over and above results obtained from a meta-analysis. A meta-analysis would ideally compare individual studies with sufficiently coherent research questions and settings. But, in most cases, the conclusions that are aggregated from such an analysis are conditional on the individual studies’ unique settings so one may miss out on the big picture. Hence, while a meta-analysis may be characterized as a bottom-up approach, a survey of experts is a more holistic approach and can therefore provide complementary views to the results obtained from a meta-analysis.

[3] Interested parties may reach the survey team by email at [email protected].

[4] The survey has been pre-tested on a sub-group of experts and was designed under the guidance of an Advisory Board comprising the following members: Mark Flannery, Thomas Gehrig, Seppo Honkapohja, William Kerr, Philip Molyneux, Steven Ongena, George Pennacchi, and Tuomas Välimäki. Any remaining errors and deficiencies are solely the responsibility of the survey research team.

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Topics:  Financial regulation and banking

Tags:  capital requirements, leverage, Bank of Finland, expert survey, total loss-absorbing capacity, TLAC

Research Economist, Bank of Finland

E. Gerald Corrigan Professor of Finance and Co-Director, Center for Research in Contemporary Finance, Fordham University

Head of Research, Research Unit, Bank of Finland

Yrjö Jahnsson Fellow, Department of Economics, MIT

CEPR Policy Research