How much capital is enough?
Remarks by Mr Jaime Caruana, General Manager of the BIS, prepared for the IESE Business School conference on "Challenges for the future of banking: regulation, supervision and the structure of banking", London, 26 November 2014.
The benefits of higher bank capital - absorbing losses, resolving incentive problems and internalising externalities related to systemic risk - are widely understood. There are of course also some costs such as higher funding costs and lower lending, especially during the transition to stronger capital requirements. But various analyses suggest that these costs are not as high as feared.
Since the agreement in 2010 to implement Basel III, lending standards globally have not been unusually tight, while lending spreads have widened little or not at all. Most banks have adjusted to the higher requirements by retaining earnings and issuing new equity, rather than by cutting back on lending. A notable exception to these patterns has been European banks, which until recently have been slow to recognise losses and restructure their balance sheets.
Moreover, longer-term economic impact studies suggest that banks' current capital ratios are still comfortably below the level at which the costs of higher capital begin to outweigh the benefits. In other words, there is room for further safeguards, as reflected in the initiative to set standards for additional loss-absorbing capacity in resolution.
While leverage in the banking system has fallen, leverage and risk-taking have been on the rise in other areas of the financial system, including through shadow banking and corporate bond issuance. Financial stability will require attention that goes beyond banking.