Optimal Bank Capital

Authors


  • Corresponding author: David Miles, Monetary Policy Committee, HO-3, Bank of England, Threadneedle Street, London EC2R 8AH. Email: david.miles@bankofengland.co.uk.

  • The authors are grateful to Anat Admati, Claudio Borio, John Cochrane, Iain de Weymarn, Andrew Haldane, Mikael Juselius, Mervyn King, Vicky Saporta, Jochen Schanz, Hyun Shin and Tomasz Wieladek for helpful comments. Jochen Schanz helped greatly to clarify our thinking about the link between our estimates of optimal capital ratios and Basel III rules. We also thank him for Appendix B. The article benefited greatly from the comments of two anonymous referees and of an editor of The Economic Journal. The views expressed in this article are those of the authors, and not necessarily those of the Bank of England or the Monetary Policy Committee or the Bank for International Settlements.

Abstract

This article reports estimates of the long-run costs and benefits of having banks fund more of their assets with loss-absorbing capital, or equity. We model how shifts in funding affect required rates of return and how costs are influenced by the tax system. We draw a clear distinction between costs to individual institutions (private costs) and overall economic (or social) costs. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.

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