Requiring banks to hold more capital: Benefits and costs

Federal regulators are proposing to increase the amount of capital that banks are required to hold as a cushion against losses on their loans and investments. Banks generally want to hold as little capital as necessary; holding more capital means less capital invested, reducing returns to stockholders. Regulators often want banks to hold more capital to reduce the likelihood that a bank will need a government rescue. (To read an explainer on this debate and the issues underlying it, visit this page.)

The regulators—the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC)—estimate that the proposal would require the largest and most complex banks to increase their common equity by about 16%. Bankers (and some dissenting Fed and FDIC board members) argue the pending proposals are overkill and will lead banks to curtail lending and hurt the economy. The proponents challenge that assertion and argue that more capital is the best way to protect banks and the economy against unanticipated risks.

To shed light on the debate about how much bank capital is enough, the Hutchins Center on Fiscal & Monetary Policy convened a virtual conversation on Tuesday, December 5, featuring experts with different perspectives on the pending proposals. Participants included Anat Admati of Stanford, Greg Baer of the Bank Policy Institute, Stephen Cecchetti of Brandeis, and Jason Goldberg of Barclays.