Fed paper searches for optimal bank capital

A working paper published in April by the US Federal Reserve attempts to quantify the costs and benefits of bank capital to arrive at an estimate of the optimal capital ratio for US banks.

Simon Firestone, Amy Lorenc and Ben Ranish attempt to calculate how the probability of financial crises falls as bank capital rises and calculate the output costs of a financial crisis. They balance this against the fact that equity tends to be a more expensive source of funding for banks than debt.

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