September 25, 2017

Social costs of different general bank capital requirements differ a lot from those of different risk weighted ones.

Sir, Michael Savage writes that though “Martin Wolf asserts that a fivefold increase in banks’ capital requirement is simple and almost without social costs… A study by William Cline of the Peterson Institute finds that each percentage point increase in capital to total assets reduces long-run gross domestic product by 0.15 per cent.” “A safer banking system demands tough trade-offs” September 25.

Indeed different general capital requirements may represent different social costs, but these would not even come close to the social costs of having different risk weighted capital requirement. That is because the latter distort the allocation of bank credit to the real economy.

Unfortunately the social costs of those distortions are rarely or even never discussed. At least you Sir seem not to be interested at all in that.