For a number of reasons (bank collapses can cause economic downturns, the government is on...
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For a number of reasons (bank collapses can cause economic downturns, the government is on the hook for deposit insurance) the government has taken an interest in trying to reduce bank failures.
One way to do this is to regulate the specific activities of banks in terms of risky activities; another way is to increase capital requirements. The idea of requiring a bank to have a lot of equity capital is that a bank failure would be less likely for two reasons -- first, a lot of equity capital means a lot of losses can be sustained before insolvency, and second that if a bank has a lot of equity capital it knows it will bear the costs of any losses (rather than passing them on to a government insurance fund) and will therefore have more incentive to be safe.
Banks generally don't like these requirements -- in general having a large equity pool can reduce your return on equity.
What do you think? Should there be high capital requirements? Should they substitute for some other regulations?
For a number of reasons (bank collapses can cause economic downturns, the government is on the hook for deposit insurance) the government has taken an interest in trying to reduce bank failures.
One way to do this is to regulate the specific activities of banks in terms of risky activities; another way is to increase capital requirements. The idea of requiring a bank to have a lot of equity capital is that a bank failure would be less likely for two reasons -- first, a lot of equity capital means a lot of losses can be sustained before insolvency, and second that if a bank has a lot of equity capital it knows it will bear the costs of any losses (rather than passing them on to a government insurance fund) and will therefore have more incentive to be safe.
Banks generally don't like these requirements -- in general having a large equity pool can reduce your return on equity.
What do you think? Should there be high capital requirements? Should they substitute for some other regulations?
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