The author examines the costs and benefits to the economy of Basel III regulatory reforms designed to strengthen the banking sector and increase the required level of equity capital of banks following the Great Recession, and whether the Basel III rules created the right balance between increased financial system safety and potential costs to economic activity. He reviews the literature on capital requirements, then analyzes the Modigliani-Miller theorem whereby capital structure is irrelevant, discussing it within the context of US banks; the benefits and costs of higher bank capital and the optimal capital ratio; total loss-absorbing capacity requirements, in terms of the literature and new evidence on the losses of the largest US banks in the recession, to determine whether they had engaged in excessive risk taking as a result of too big to fail incentive distortions; the literature claiming that there is already too much finance, based on statistical correlations of growth with indicators of financial depth; and how the optimal capital ratio is about one-third larger than the target set in Basel III. Annotation 2017 Ringgold, Inc., Portland, OR (protoview.com)
