Before anyone ever discusses the subject again, or listens to another banker bellyaching about how increased capital requirements will slow down economic growth and hurt everybody, he or she must read the scholarly study by an international group of researchers entitled “Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive” (hat tip Felix Salmon). The study is Working Paper No. 86 of the Rock Center for Corporate Governance at Stanford University, and it is based on science, not self-serving argumentation.
The working paper completely debunks the range of arguments mounted against increasing capital requirements, from how increased capital would prevent banks from operating at optimal scale to how such increased requirements would lead banks to reduce lending. Wherever one of these arguments might have some merit from the narrow point of view of the protagonist, the authors go on to demonstrate why the supposed “benefit” is nevertheless detrimental from a public policy perspective. (For a convenient cheat sheet, see page 52.)
How timely: just as the Basel Committee begins to wrap up its proposals for heightened capital requirements in the face of bank opposition. As one who is strongly in favor of tougher capital requirements, Felix Salmon is currently moderately optimistic. Having been burned once already, I am less so!