Benefits and Costs of Bank Capital

This paper contributes to the debate by assessing the benefits of bank capital in terms of its ability to absorb losses. Its findings support the range of loss absorbency suggested by the Financial Stability Board (FSB) and the Basel Committee for systemically important banks. The authors measure these benefits against the yardstick of how much capital would have been needed to avoid imposing losses on bank creditors or resorting to public recapitalizations in past banking crises. The paper also looks at the welfare costs of tighter capital regulation by reviewing the evidence on its potential impact on bank credit and lending rates.