Recalling 4 years back , the world’s largest banks have been up in arms over threats by regulators to increase their (equity) capital requirements. Making banks hold more capital, they argue, will force them to reduce lending and will increase their cost of funding, making credit more expensive throughout the economy. One of the chief defenders of the mega banks has been Josef Ackermann, CEO of Deutsche Bank until last year and also chair of the Institute of International Finance, which claimed that higher capital requirements would reduce economic output by a whopping 3.2 percent.
Was going through the new book by Anat Admati and Martin Hellwig The Banker’s New Clothes they have been tirelessly debunking the myth that higher capital levels will force banks to curtail lending and torpedo the global economy,. Some of the arguments against higher capital requirements are simply incoherent, like the idea that banks would be forced to set aside capital instead of lending it. Continue reading “The Definition for Cost of Capital and The Banks”