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Title:Optimal bank capital PDF Logo
Authors:Miles, David
Yang, Jing
Marcheggiano, Gilberto
Issue Date:2011
Series/Report no.:External MPC unit discussion paper 31 [rev.]
Abstract:This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs - however accurate - can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. 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.
Subjects:banks
capital regulation
capital structure
cost of equity
leverage
Modigliani-Miller
JEL:G21
G28
Document Type:Working Paper
Appears in Collections:External MPC Unit Discussion Papers, Bank of England

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