Nistor, S., Ongena, S. (2024). Capital Requirements: Why, How High, Increasing them, Alternatives? Swiss Finance Institute Public Discussion Note, 2024. Available at: https://www.sfi.ch/en/publications/bank-capital-requirements.
Capital requirements are one of the prime tools wielded by policymakers in the banking sector. In this SFI Public Discussion Note, we discuss the raison d'être for these requirements, how they are currently implemented, what the consequences may be of increasing them, and what alternative tools policymakers could use to reach their objectives. We conduct a thorough review of the academic literature, highlighting both well-established theoretical models and empirical findings, while also identifying ongoing fields of research. We present the underlying mechanisms of capital requirements from both micro and macro perspectives, and then differentiate between their static and dynamic dimensions, providing examples and referencing relevant literature throughout.
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