Johnson Anumah
FISV2012
Professor Vilacha
2/1/2018
Homework 4
Why high capital requirements may restrict a bank’s access to capital is so that banks
can be more resilient to future financial downturns. According to research the increase in
capital requirements really benefits the economy. The new capital regulation will reduce credit
and increase lending rates, that may deepen the economic recession is the basic concern. But
the most popular argument debates that by saying it will promote financial stability. This will be
enhanced by: reducing banks becoming financially distressed and minimizing banks losses given
default. A higher level of capital exposes shareholders to more downside risk. So that then in
turn higher capital requirements reduce banks incentives to take risk. Shareholders benefit
from upside returns but are protected from downside risk. Asset risk is not properly priced by
depositors and banks do not take on the asset losses fully. Banks then are encouraged to make
risker takings. Higher capital requirements detour them from that.
Higher capital requirements can cause lower profits, which can reduce banks franchise
value that cause their stream of future earnings. Lower franchise value decreases the
shareholder value that can be lose incase of asset returns and cause risk taking incentives. This
looks down on the main effect of capital regulation. Others argue that the anticipation of future
capital requirements may enhance more risk-taking today. There is a positive relationship
between bank leverage and equity risk. According to research “Another line of research
examines the impact of capital requirements on bank risk-taking. De Haan and Klomp (2012)