from Greenberg Center for Geoeconomic Studies

Reforming Capital Requirements for Financial Institutions

April 01, 2009

Report

More on:

Financial Markets

Inequality

Overview

This Working Paper, the second in a series from the Squam Lake Working Group distributed by the Center for Geoeconomic Studies, argues that regulators consider systemic effects when setting bank capital requirements. Everything else the same, capital requirements should be proportionately higher for larger banks, banks that hold more illiquid assets, and banks that finance more of their operations with short-term debt. But capital requirements are not free. When designing capital requirements that address systemic concerns, regulators must weigh the costs such requirements impose on banks during good times against the benefit of having more capital in the financial system when a crisis strikes.