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The global financial crisis produced an important agreement among regulators in 2010'11 to raise capital requirements for banks to protect them from insolvency in the event of another emergency. In this book, William R. Cline, a leading expert on the global financial system, employs sophisticated economic models to analyze whether these reforms, embodied in the Third Basel Accord, have gone far enough. He calculates how much higher bank capital reduces the risk of banking crises, providing a benefit to the economy. On the cost side, he estimates how much higher capital requirements raise the lending rate facing firms, reducing investment in plant and equipment and thus reducing output in the economy. Applying a plausible range of parameters, Cline arrives at estimates for the optimal level of equity capital relative to total bank assets. This study also challenges the recent "too much finance" literature, which holds that in advanced countries banking sectors are already too large and are curbing growth.

Bank capital. --- Asset requirements. --- Banks and banking. --- Bank failures --- Financial crises --- Crashes, Financial --- Crises, Financial --- Financial crashes --- Financial panics --- Panics (Finance) --- Stock exchange crashes --- Stock market panics --- Crises --- Failure of banks --- Business failures --- Agricultural banks --- Banking --- Banking industry --- Commercial banks --- Depository institutions --- Finance --- Financial institutions --- Money --- Capital asset requirements --- Financial responsibility requirements --- Minimum asset requirements --- Requirements, Asset --- Assets (Accounting) --- Capital --- Prevention. --- Bank capital --- Asset requirements --- Banks and banking --- Prevention --- E-books --- Private finance

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We study the welfare properties of a New Keynesian monetary economy with an essential role for risky bank lending. Banks lend funds deposited by households to a financial accelerator sector, and face penalties for maintaining insufficient net worth. The loan contract specifies an unconditional lending rate, which implies that banks can make loan losses. Their main response is to raise lending rates to rebuild net worth. Prudential rules that adjust minimum capital adequacy requirements in response to loan losses significantly increase welfare. But the gains from eliminating limited liability and moral hazard would be an order of magnitude larger.

Bank loans --- Asset requirements --- Capital asset requirements --- Financial responsibility requirements --- Minimum asset requirements --- Requirements, Asset --- Assets (Accounting) --- Bank credit --- Loans --- Econometric models. --- Banks and Banking --- Money and Monetary Policy --- Industries: Financial Services --- Investments: Stocks --- Financial Markets and the Macroeconomy --- Monetary Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Pension Funds --- Non-bank Financial Institutions --- Financial Instruments --- Institutional Investors --- Financial Institutions and Services: Government Policy and Regulation --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Interest Rates: Determination, Term Structure, and Effects --- Finance --- Banking --- Financial services law & regulation --- Monetary economics --- Investment & securities --- Mutual funds --- Capital adequacy requirements --- Financial institutions --- Financial regulation and supervision --- Stocks --- Central bank policy rate --- Financial services --- Banks and banking --- Credit --- Interest rates --- United States