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Third Quarter 2019, 
Vol. 101, No. 3
Posted 2019-07-12

An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the United States

by Simon Firestone, Amy Lorenc, and Ben Ranish

We evaluate the economic costs and benefits of bank capital in the United States. The analysis is similar to that found in previous studies, though we tailor it to the specific features and experience of the U.S. financial system. We also make adjustments to account for the impact of liquidity- and resolution-related regulations on the probability of a financial crisis. We find that the level of capital that maximizes the difference between total benefits and total costs ranges from just over 13 percent to 26 percent. This range reflects a high degree of uncertainty and latitude in specifying important study parameters that have a significant influence on the resulting optimal capital level, such as the output costs of a financial crisis or the effect of increased bank capital on economic output. Finally, the article discusses a range of considerations and factors that are not included in the cost-benefit framework that could have a substantial impact on estimated optimal capital levels.

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