Inde

absolute growth convergence, 188

ACC. See average cost of capital (ACC) Acemoglu, Daron, 188«

Acharya, Viral, 143

Admati, Anat, 3, 4-5, 22-23, 53-54, 116, 118-19

bank equity capital recommendation, 115

Afonso, Gara, 10, 140-41

aggregate output floor, 211 aggregate production function approach, 129, 150«

AIG, 137, 159, 213

support for, 158

Ally Financial, 65«

almost ideal (AI) demand system approach, for estimating utility-maximizing profit, 145

AmTrust, 154«

Angelini, Paolo, 48

Anginer, Deniz, 143

Araten, M., 144

arbitrage, 72

vs.

Arcand, Jean-Louis, 178, 182, 183«, 194 reply to, 201-04

Ashcraft, Adam A., 10, 135 assets, opacity in valuation, 165

AT1 bonds, of Deutsche Bank, 173

Australia

output loss estimates from banking crises, 93t

private credit and GDP, 186

Austria, output loss estimates from banking crises, 92t

available stable funding, categories, 18« average bank lending rates, and TLAC liabilities, 150

average capital cost, with no M&M effect, 68

average cost of capital (ACC), 59-60, 71-72, 103-06

demonstrating constant, in M&M, 75-76 implications of bank capital requirements increase, 66-69 average return on equity, 29 Avgouleas, Emilios, 161

Bagehot, Walter, 138

bail-in

enforcing, 161

shift to forced, 207

bail-in securities, 149

bank bailouts, limiting taxpayer costs for future, 133

bank betas, 81 bank capital

benefits, 124

problems with estimates of, 126-27 benefits and costs of additional, 111/ requirements

costs of increasing, 77

implication of increase for average cost of capital, 66-69

output cost to economy from, 106 bank debt, reducing, and interest rate decline, 50-51

bank equity capital, optimal amount, 205 Bank for International Settlements (BIS), 126, 178, 210

report on costs and benefits estimates of TLAC, 149-51

bank holding companies

funding costs for larger, 143 surveillance of affiliated banks, 135 bank lending rates

average, and TLAC liabilities, 150 in US and euro area, 78/

bank leverage ratio, beta as function of, 58 bank net incomes, distribution relative to assets, 64/

Bank of America, 155, 158, 159

fines, 166

and Merrill Lynch, 137

stress test, 19 n

Bank of England, 16, 35-36, 142 optimal capital ratio evaluation, 33 review estimating TBTF subsidy, 138

Bank Recovery and Resolution Directive of April 2014, 161

Bank Recovery and Resolution Directive, Single Resolution Mechanism, 17 bank regulatory requirements, for assessment for TLAC, 22

bank stress, 207 banking crises

annual probability, 97-98

banking capital requirements and reduction, 87

costs

long-term, 8, 207-08

modeling of, 22

damage from, 4

optimal capital ratios and, 110 losses, 92t

annual, as percent of GDP, 98 calculating, 88-103, 90/

long-term, 89-91 long-term in UK, 37-38 present value of loss, 31, 33, 108, 115 probability

of avoiding, as function of capital/ risk-weighted assets, 125/ as function of bank capital/risk- weighted assets, 126-27, 127/ and level of capital, 117 reduced, 121

banking crisis in 2008-09, 205.

Banking Recovery and Resolution Directive, 207

banking sector, 1 banks

bankruptcy of large, 118 borrowing cost for, 69-70 debt/equity characteristics of, 55 economies of scale in, 10 large vs. small, 212 living wills for, 1 minimum capital requirements, 53 and nonfinancial sector, 55-57 real interest rate paid by, 104 resolution

of bankrupt G-SIBs, 130

and crisis management, 157-61 retained earnings, 45-46 risk taking, 140

subordinated debt and, 139

share of largest in US and other countries, 154-56

size, and risk, 140, 141-42

stocks

average stock return, 141, 142 market valuations and cost to raise capital, 171 volatility of, 138

BankUnited, 154n

Barclays, 213 Barrell, R., 30 Barro, Robert J., 187

Basel Committee on Bank Supervision (BCBS), 2, 28

comparison with estimates, 96-98 Long-Term Economic Impact (LEI) analysis, 5, 8, 28-29, 107

and M&M offset, 54n

Macroeconomic Assessment Group (MAG), 41

reforms, 194 survey in 2010, 99, 114

Basel I accord, 2

Basel II accord, 2

Basel III reforms, 2, 19, 37, 205

capital requirements, 205 schedule, 27

change from Basel II, 53n

and FSB capital requirements for G-SIBs, 116-18, 117t

implications for targets, 209 leverage ratio, 172

liquidity standards, 18-19 minimum for G-SIBs, 210 minimum leverage target, 15 need for further improvement, 205 and optimal capital ratio, 4 requirements, 40

for TLAC, 133

revisions to, 211

risk-weighted assets requirement, 116-18 on TBTF, and subordinated debt, 139 Basel IV rules (proposed), 2n

revisions for risk weighting, 15

Bear Stearns, 154, 159

in financial crisis 2008, 137 Begenau, Juliane, 50-51 behavioral capital cushion, 209-10 Belgium

output loss estimates from banking crises, 92t

private credit and GDP, 186 benefits curve, 101, 102/ Berkes, Enrico, 178, 182, 183n, 194

reply to, 201-04 Berlin, Mitchell, 55 Big Bank in UK, 141 borrowing cost, for banks, 69-70

calibrated optimization, 28-38 California National, 154n

Calomiris, Charles W., 10, 23, 56-57, 136, 137n

Canada, losses, 93t, 95 capital.

appropriateness of reform level, 205

BCBS synthesis of impact on probability of systemic banking crisis, 100t cost-minimizing structure, 36 cost of additional, 32 increase, and GDP long-run level, 4 interaction with liquidity, 32 low stock valuations, and cost of raising, 171

optimal level, 88

social costs of raising, 47

tangible common equity concept of, 117 capital assets pricing model (CAPM), 7

vs. direct estimation, 57-58 framework, 79

Yang and Tsatsaronis use with leverage as shift variable, 80

capital cost, average, 68 capital ratios

increase, and drop-off in crisis probability, 8

optimal for banks, 209 capital requirements

adverse spillover effects, 41 benefits of, 51

benefits of higher, 88-103, 208 costs of higher, 103-07, 208 economic studies of costs and benefits, 21

marginal costs of, 51

optimal, 108-10

MP study overstatement, 131 capital requirements benefits curve, 98-99 calibrating, 99-103 capital to assets ratios

basis point increase, 24-25 calculating optimal, 7-9 impact of raising, 671 optimal, 96

capital to risk-weighted assets ratio negative effect on GDP, 42 optimal, 114

capitalization, 215

CAPM. See capital assets pricing model (CAPM)

Cecchetti, Stephen G., 5, 47, 178, 179, 182, 194

charge-offs

as fraction of total assets, 152 large vs. medium banks, 154 charter value hypothesis, 140

Citigroup, 159

derivatives, 171

Federal Reserve's guarantees, 158 merger with Travelers Group, 155 overoptimism in valuation, 172 real assets, 155 scaling back, 155n

stress test failure in 2014, 19n

Clerc, Laurent, 48-49 CoCo. See contingent convertible (CoCo) coefficient of equity cost on leverage, 7 coefficient of per capita growth on per capita income, 188

Cohen, Benjamin H., 5, 45-46, 68 Colonial, 154n common equity capital, 2009 to 2012, 68 common equity requirement, 136 common equity tier 1 capital, 163 compensation of employees, as percent of national income, 109n

Comptroller of the Currency, 13 conditional growth convergence, 188 confidence intervals, for US bank ratio averages, 62

Consumer Protection Act, 170 Continental Illinois, 91, 143 contingent claims approach, 138 contingent convertible (CoCo) capital, 1 for supplementing equity capital requirement, 57

contingent convertible (CoCo) debt, 9, 10, 19, 118, 133-34

disciplinary role of, 135-36 as part of capital requirement, 210 with perpetual maturity, 137n preferred investors for, 148-49 as proposed requirement, 136-37 UK suspension of sales, 149 control group, of advanced economies without crisis, 93t, 94-95 convergence factor, 188 core tier I capital, 2n corporate borrowing, sources of, 113 Correa, Ricardo, 10, 140 Corus, 154n cost curve, 127-29, 205 cost-minimizing capital structure, 36 cost of additional capital, 32 cost of equity capital, 67

estimating influence of leverage, 79 trends in unconstrained earnings indicators, 83

costly state verification, 49

costs

elasticity, output size and, 145 of higher capital requirements, 103-07, 205

country fixed effects, 188, 204

and misleading results, 191

Countrywide, 154

Cournede, Boris, 28, 42, 184

lack of solid base for conclusions, 193 negative coefficients in study, 203 radical policy implications of accepting results, 194

specifications of regressions for per capita GDP growth, 185t

study results, 185-87

credit

causality, and per capita income, 184 plausibility of negative impact size, 186 punitive taxes to shrink, 202 credit default swap (CDS) rate, 74 credit finance, and growth, 183 Credit Suisse, 174, 213

crisis avoidance, gross benefits, 34

crisis damage, 124

crisis probability curve, 109, 131 cross-country growth data, 199 cross-country growth patterns, 186-87 cross-country tests, and exclusion of country fixed effects, 189

Dagher, Dell'Ariccia, Laeven, Ratnovski,

Tong (DDLRT), data compilation, 123

Dagher, Jihad, 5, 27, 115

damage estimates, crisis severity and, 96 Davies, Richard, 10, 146-47, 162

De Nicolo, Gianni, 52

de-Ramon, Sebastian, 37-38

DeAngelo, Harry, 56

debt financing, 55

and M&M model, 71

Debt Guarantee Program, 159

debt to equity ratio, relationship of unit cost of equity capital to, 85f

Dell'Ariccia, Giovanni, 123

Denk, Oliver, 184

lack of solid base for conclusions, 193 negative coefficients in study, 203 radical policy implications of accepting results, 194

specifications of regressions for per capita GDP growth, 185t

study results, 185-87

Denmark, output loss estimates from banking crises, 92t

dependent variable, negative relationship between exogenous variable and, 198 deposit insurance, 56

depositors, interest rate for, 169 deposits, as financial liabilities, 55 derivatives

bilateral netting of, 18n

Deutsche Bank and, 171-72, 174

Deutsche Bank, 13, 134, 213

capital adequacy and market valuation, 171

derivatives, 171-72, 174 implication of difficulties, 165 optimal capital requirements, 175 possible need for new equity, 173 potential missed coupon on convertible bonds, 149

share price 2015/16, 165

solvency, 174-75

stock price decline, 166-67 discount rate, 61 distance from insolvency ratio, 139 diversification, and risk, 148 “doctors” variable, 179

Dodd-Frank Act of 2010, 12, 207

Collins Amendment, 15, 170, 211 constraints on Federal Reserve, 158-59, 212-13

Orderly Liquidation Authority, 130 and too big to fail, 214

Volcker rule, 1, 53n

Downey, 154n

Dudley, William, 159

dynamic stochastic general equilibrium (DSGE) models, 6, 22, 44 estimates, 48-52

earnings, expected future, 61

earnings indicators, trends for cost of equity capital, 83 earnings yield (EY), 62, 63f

and asset risk, 61

vs.

bank breakup and, 157

in banking, 10, 214-15

at largest banks, 162

TBTF literature on, 144-48

TBTF status and, 143

TBTF subsidy and, 146-47

test for, 146

economy, benefit from any given level of capital, 124

education, cross-country studies of returns, 190n

Eisenberg, Larry, 36 elasticity of costs, output size and, 145 endogeneity bias, 66, 85-86 equity

alternative measures of cost, 7

bank total assets as, 3

and unit borrowing costs for banks, 69 unit cost of, 7

equity beta, 79

equity capital

cost, 67

alternative measures, 62 economists' arguments for high levels, 205

importance, 2

ratio to total assets, 104

unit cost of, 65-66

equity capital target, for large banks, 19 equity cost to firms, 109

equity market beta coefficient, 31

equity ratios

historical trends, 23

quasi-market value of, 136 equity yield, ratio of debt to equity and, 58 estimates

based on related linear equations, negative quadratic influence, 197-98 direct, vs. capital assets pricing model betas, 57-58

euro area

bank lending rates, 78f

European Central Bank as lender of last resort, 161

European banks, 13

optimal capital range, 113

risk-weighted assets/total assets ratio, 15 systemic implications of problems at major, 165-75

vs. US banks, 16-18

European Commission, estimates, 45

European Union, shift from lender-of-last resort to bail-in, 161

Evanoff, Douglas D., 10, 135

expected annual stream of income earned, 71

expected future earnings, 61 expected output, calculating, 88

Fama, Eugene F., 6, 55, 58

Fannie Mae, 159

in financial crisis 2008, 137

Federal Deposit Insurance Corporation (FDIC), 12, 17, 91, 214 interventions, 26

receivership of financial companies, 157 Federal Reserve

constraints as lender of last resort, 12, 161n

constraints on lending to nonbank affiliates of banks, 159

Dodd-Frank constraints on, 158-59, 212-13

interest on excess reserves, 16 macroeconomic model, and higher bank capital cost on GDP, 128

Federal Reserve Act, 158

Federal Reserve Bank of Minneapolis, 38, 115

Plan to End Too Big to Fail, 123-31 finance

quadratic term and linear term, 202 relating growth to, 203

finance variable

and country fixed effects, 189

sign of, 193

financial crises

average incidence, 124

control group of advanced economies without, 93t, 94-95

financial crisis of 2007-09, 53

credit write-downs, 25

financial depth, growth for low vs.

Financial Stability Board (FSB), 23, 46, 117, 149

TLAC recommendations, 27 Finland

and banking crisis, 95

financial crisis, 91

output loss estimates from banking crises, 92t, 93f

R&D technicians, and growth, 180

First Federal of California, 154n

Fitch support rating floors (SRF), 140-41 Flannery, Mark J., 140

France

combined assets of large banks as percent of GDP, 156

output loss estimates from banking crises, 92f

Franklin, 154n

Freddie Mac, 159

in financial crisis 2008, 137

French, Kenneth R., 6, 55, 58 funding advantage approach, 138 funding costs

for larger bank holding companies, 143

LEI study on, 29

Gamba, Andrea, 52

Gambacorta, Leonardo, 33-34, 69 Geithner, Timothy F., 159

General Accounting Office (GAO), 143 Generally Accepted Accounting Principles (GAAP), 18, 171

German Banking Industry Committee, 211n

Germany, output loss estimates from banking crises, 92f

Glass-Steagall Act of 1933, 155 global systemically important banks

(G-SIBs), 1

Basel III and FSB capital requirements for, 116-18, 117t

Basel III reforms requirement for TLAC, 133

capital requirements, 116, 123 minimum requirement for, 9 price-to-book ratios, 167, 168/ ratio of share price to book value, 170t resolution of bankrupt, 130 study of capital needs, 23-24 US vs. Europe performance, 169

Goldman Sachs, 155, 159 derivatives, 171 fines, 166 overoptimism in valuation, 172

Goldstein, Morris, 13, 14, 24-25

Goodhart, Charles, 161 government support, influence of

(potential), 140 Gramm-Leach-Bliley Act, 141, 155 Great Recession of 2007-09, 1, 53, 91, 177 bank losses in, 26 bank size and losses, 4, 214 indicators of relative impact, large vs.

medium banks, 153t lender of last resort in, 159 output losses, 208 US banks in, 134, 151-54

Greece, 127n

output gap, 94 output loss estimates from banking crises, 92t

peak NPLs, 127f private credit and GDP, 186 gross domestic product (GDP) annual loss from crisis, 98 capital increase and long-run level of, 4 combined assets of largest US banks as percent, 155-56, 156f

identifying benchmark baseline, 88-89 ratio of liquid liabilities to, 178

Group of Ten, 2

growth driver in cross-country tests, 188 influence of financial intermediation, 11 for low vs.

and per capita income, 181, 181f 203 relating to finance, 203 variables influencing long-term potential, 188

growth per capita in emerging-market and developing countries, 188

and purchasing-power-parity (ppp) per capita income, 179

G-SIBs. See global systemically important banks (G-SIBs)

Guaranty, 154n

Hall, Maximilian J.B., 34

Hanson, Samuel G., 23, 81

Hellwig, Martin, 3, 4-5, 22-23, 53-54, 115, 116

Herring, Richard, 10, 55-56, 56-57, 136, 137n

heuristic seawall studies, 21, 22-28

Hindlian, Amanda, 143

historical estimate of asset volatility, 138-39

Hoenig, Thomas M., 13, 15, 23

HSBC, 155

Hughes, J., 10, 145-46

Iceland, 127n

output loss estimates from banking crises, 92t

peak NPLs, 127

income-book equity ratio, vs. earnings yield,

63

IndyMac, 154n

Institute of International Finance (IIF), 2,

43, 77

interest rate

decline, bank debt reduction and, 50-51 for depositors, 169

interest rate swaps, 174 intermediated credit, to private sector, 185 International Financial Reporting

Standards (IFRS), 18

International Monetary Fund (IMF), 25,

178

on advantage of being SIB, 144 adverse spillover effects in capital requirements, 41

and Deutsche Bank, 166

output gap calculations, 95-96

output gap estimate, 94

and seawall framework, 26-27

interstate banking, 155

Intesa Sanpaolo, 13

investment, as explanatory variable in cross­country tests, 189

investment banks, and Great Recession, financial crisis, 137

investors, and risk taking penalties, 139

Ireland

output gap, 94

output loss estimates from banking crises, 92t

Israel, private credit and GDP, 186

Italy

doctors' density, 179

output loss estimates from banking crises, 92t

Jagtiani, Julapa A., 10, 135

Japan, 127n

and banking crisis, 95

financial crisis, 91

financial development annual growth, 182

growth rate and credit reduction, 204 losses in economy, 95

output loss estimates from banking crises, 92t, 93t

peak NPLs, 127f

private credit, 186

R&D technicians, and growth, 180

JPMorgan Chase, 155

asset guarantee, 158

asset size, 60

derivatives, 171

in financial crisis 2008, 137 overoptimism in valuation, 172 risk-weighted assets, 13

Kashyap, Anil, 23, 57, 81

Kato, R., 32

Keely, Michael C., 140

Kharroubi, Enisse, 178, 179, 182, 194

King, Michael R., 27-28, 177-78

King, Robert G., 187

Kirkegaard, Jacob, 166n

Kobayashi, S., 32

Korea, 127n

peak NPLs, 127f

Kragh-Sorensen, Kasper, 36

Laeven, Luc, 28, 123, 141-42

large banks, share in US and other countries, 154-56

Lehman Brothers, 13, 25-26, 154, 210

in financial crisis 2008, 137

LEI study (Basel Committee), 5, 8, 28-29, 107 lender of last resort, 24, 26, 158, 212-13 constraints on Federal Reserve, 12 European Central Bank as, 161 in Great Recession, 159

shift to forced bail-ins, 207

lending rates, higher capital requirements impact, 27, 81

lending spreads, 47 leverage

average cost of capital and, 72

estimating influence on cost of equity capital, 79

leverage ratio, 104

capitalization, 53

minimum for bank holding company, 13 Levine, Ross, 177-78, 187

Liikanen Report, 14

linear equations, estimates based on related, negative quadratic influence, 197-98 linear term of finance, 202

liquid liabilities, ratio to GDP, 178 liquidity

central bank and, 26 interaction with capital, 32 requirements, 18-19 long-term impact on output, 48 liquidity spread, 56 living wills for banks, 1 loan spread, 56

Long-Term Economic Impact (LEI) analysis, 5, 8

long-term growth potential, variables influencing, 188

loss equivalency probability, 173 loss given default (LGD), 124 losses

capital equal to, 123 cumulative in initial years, 88-89 present value of, 89

and proxy for expected stream of future earnings, 61

Lucchetta, Marcella, 52

Macroeconomic Assessment Group (MAG), 5, 41, 150, 209

Maiden Lane, 158 Mankiw, N. Gregory, 187 Marcheggiano, Gilberto, 5-6, 8, 30, 54n, 69,

79, 106, 114-15, 128, 150 market discipline hypothesis, 140

Marques, Luis Brandao, 10, 140

McAllister, Patrick H., 147-48

McFadden Act of1927, 154

McManus, Douglas, 147-48

Mendicino, Caterina, 49-50

Merler, Silvia, 16, 113

Merrill Lynch, and Bank of America, 137 Merton, Robert C., 140

Merton-style structural credit risk portfolio model, 33

Mester, L., 10, 145-46

Miles, David, 5-6, 8, 30, 54n, 69, 79, 106, 114-15, 150

aggregate production function use, 128 minimum equity capital, 22-23 Minneapolis Plan, 115

comparison with current study results, 129

to end too big to fail, evaluation, 123-31 Modigliani-Miller (M&M) theorem, 3, 22-23, 43, 53-86, 205

data for testing, 60-65

demonstrating constant average cost of capital in, 75-76

offset, 127

alternative analyses of, 77-82

size, 207

and optimal relationship of equity finance to debt finance, 54

and risk, 59

specification for empirical test, 59-60

test results, 65-66

testing, 6-7

monetary policy offset, and costs of additional capital, 120

money multiplier, 16

Monte Carlo experiments, country fixed effects in, 189

Moody's bank financial strength ratings, 140

Morgan Stanley, 159

risk-weighted assets, 13

national income, employee compensation as percent, 109n

National Institute Global Econometric

Model (NiGEM), 30, 37

negative net earnings, in bank-year observations, 61 negative quadratic effects, bias toward,

181-82

negative quadratic term on finance, 182,

204

net earnings, change as fraction of assets,

11

net income

for large banks, distribution, 63

relative to assets between 2006-07 and

2008-10 for large US banks, 152, 152f relative to equity and earnings yield, 83f relative to equity, earnings yield and debt

to equity ratio, 63f

net income to assets ratio, reductions in,

152

net income to book equity ratio, 46

net income to equity ratio, 62

net interest income, 68

net stable funding ratio (NSFR), 46n, 101 Netherlands, output loss estimates from

banking crises, 92f

New Zealand

output loss estimates from banking crises, 93f

private credit and GDP, 186

Nguyen, Tu, 139

Nakata, Taisuke, 10, 135

Noe, Thomas H., 36

nonbank firms average cost of capital (ACC), 105-06 and banking, 55-57 constraints on Federal Reserve lending,

159

lender of last resort access, 213 minimum equity, 22 nonlinear finance hypothesis, 178n nonperforming assets

as fraction of total assets, 152 large vs. medium banks, 154

Norges Bank, Financial Stability Board

(FSB), 36-37

Northern Rock, in financial crisis 2008, 137 Norway

banking crises, 95

output loss estimates from, 92f, 93f doctors’ density, 179 financial crisis, 91

Noss, Joseph, 144

OECD countries

cross-country growth regressions, 185 study of financial depth and growth reduction, 183-84

optimal capital ratios, 209 calculating, 7-9 early study of requirements, 30 equation for changes, 113

MP study on, 129

ratio of capital to risk-weighted assets (TCE/RWA), 114

and risk-weighted assets, 205 summary, 38-40, 39t optimal capital, requirements, 30 optimal capital requirements, 108-10

MP study overstatement of, 131 results, 110, 113-14

optimal capital to assets ratio, 96 frequency of estimates for, 112f optimization

vs. arbitrage, 59

calibrated, 28-38

option-price estimate of asset volatility, 138-39

orderly liquidation authority (OLA), 12, 157, 214

and TLAC, 160

Organization for Economic Cooperation and Development (OECD), 27 banking crises incidence, 30 Cournede-Denk estimates for, 189 estimates of medium-term decline in growth, 42

New Global Model, 42

output

cost to economy from bank capital requirements, 106

cumulative five-year loss, 94 size, and elasticity of costs, 145 output losses, from banking crises, 92

PacWest Bancorp, net stable funding ratio

(NSFR), 60

Panizza, Ugo, 178, 182, 183«, 194

reply to, 201-04

Penn World Table, 190, 199

per capita GDP growth, Cline estimates for regression specifications, 190t per capita income. See also purchasing­power-parity (ppp) per capita income in finance studies, 182-84 and growth, 181, 181f purchasing-power-parity (ppp), 179 telephone density and, 180

per capita real growth rate, 199 Persaud, Avinash D., 148 physicians per 1,000 population, 179 plausibility, of negative impact size of credit, 186

population, working-age, 88-89 Portugal, output loss estimates from banking crises, 92t

ppp. See purchasing-power-parity (ppp) per capita income

price-to-book ratios, 46

for G-SIBs, 167, 168f prime rate, spread between 5-year US Treasury rate and, 77 private credit

and GDP, 186

linear coefficient of growth on, as percent of GDP, 193

reestimating impact, 187-94 private returns, vs. social, 118-19 private sector, intermediated credit to, 185 production function approach, 6

to long-term output impact of higher lending costs, 30

production, target for capital and, 25 prompt corrective action, 14 proprietary trading, 1

Prudential, 213 purchasing power parity (ppp), 184 purchasing-power-parity (ppp) per capita income, 187

and growth per capita, 179 logarithm of lagged, 194 logarithms of, 190

quadratic term of finance, 202 quasi-market value of equity ratio, 136 QUEST model, 45

R-G Premier, 154«

R&D technicians, influence of additional on growth, 180

Rajan, Raghuram G., 57 ratings-based estimates, and TBTF subsidy,

138

ratio of capital to assets

basis point increase, 24-25 calculating optimal, 7-9 impact of raising, 67t optimal, 96

ratio of capital to risk-weighted assets

(TCE/RWA)

negative effect on GDP, 42

optimal, 114

ratio of debt to equity, 62, 63f

and average cost of capital, 75

equity yield and, 58

ratio of equity capital to total assets, 104 ratio of liquid liabilities to GDP, 178 ratio of net income to book equity, 46 ratio of notional value of derivatives to

GAAP assets, 171-72

ratio of private credit to GDP, 191

ratio of risk-weighted to total assets, 211 ratio of share price to book value, for

G-SIBs, 170t

ratio of subordinated debt to regulatory capital, 135

ratio of total assets to equity capital, 6-7

Ratnovski, Lev, 123, 141-42

real interest rate paid by banks, 104 regressions for per capita GDP growth,

Cline estimates for, 190t

Reinhart, Carmen M., 28 resolution of bankrupt G-SIBs, 130 resolution of banks, and crisis

management, 157-61

retained earnings, additional equity from, 2, 166, 171

return on equity, average, 29

Riegle-Neal Interstate Banking Act of 1994,

155

risk

of banks, 140 subordinated debt and, 139

and diversification, 148 relationship between spreads and indicators, 135

z-scores as measure, 140 risk-weighted assets (RWA), 5, 19, 104, 205

Basel III reform requirements, 116-18 dealing with problem, 210-12

vs. total assets, 12-16, 23 understatement, 165 risk-weighted capital ratios, retained earnings and increase, 45-46 Roger, S., 44-45 Rogoff, Kenneth S., 28 Romer, David, 187 Royal Bank of Scotland, 142

potential fines, 166

Sachs, Jeffrey D., 187 Sahay, Ratna, 182, 183n

Saita, Y., 32 Santos, Joao, 10, 140-41 Sapriza, Horacio, 10, 140

Sarin, Natasha, 174 savings and loans banks, crises, 91 Scatigna, Michela, 68

Schanz, Jochen, 33 Scott, Hal S., 158 seawall approach, to capital levels determination, 5

Securities and Exchange Commission, 13

10-K reports, 60, 151 shadow banking, bank regulatory reform and, 16

Shin, Hyun Song, 69 Siegert, Caspar, 143, 144

SIFIs (systemically important financial institutions), 53

single point of entry (SPOE) approach, 12, 159-60, 215

and TLAC, 160 size-based estimates, and TBTF subsidy, 138

Slovik, Patrick, 28, 42 social costs, 5

of raising capital, 47 social returns, vs. private, 118-19 Sorescu, Sorin M., 140 Sowerbutts, Rhiannon, 144 Spain, output loss estimates from banking crises, 92t

spreads, relationship between risk indicators and, 135

SRISK, for measuring systemic risk, 142 St. Petersburg Summit of the Group of

Twenty (G-20), 117

Stein, Jeremy C., 23, 57, 81 stocks, price of, 61 stress tests, 1, 18-19 studies, quantitative findings of, 4

Stulz, Rene, 56 subordinated debt, 1, 118, 133-34

Basel accord on, 2 disciplinary role of, 135-36 mandatory requirements, 136 as part of capital requirement, 210 and risk of panic dynamics, 19, 163 risk taking of banks and, 139

TLAC and, 9-10

Summers, Lawrence H., 174

Sweden

financial crisis, 91 output loss estimates from banking crises, 92t

Switzerland

combined assets of large banks as percent of GDP, 156

doctors' density, 179 output loss estimates from banking crises, 92t

telephones, 180

Synovus Financial, 65n systemic risks, Deutsche Bank contribution

to, 166 systemically important financial institutions (SIFIs), 53

tangible common equity, 19

optimal level, 4 relative to total assets, 14

taxes, punitive to shrink credit, 202 taxpayers

avoiding losses to rescue banks, 213 and future bailouts, 133, 162

Taylor rule, 128 telephones, density, per capita income and, 180

10-year Treasury bond rate, 89n tier 1 capital, 62, 163 tier 2 capital, 2n

subordinated debt to raise, 139 time period, for cross-country tests, 189 TLAC. See total loss-absorbing capacity (TLAC)

Tong, Hui, 123, 141-42 too big to fail (TBTF), 10, 118, 213-15

incentive distortions, 3

and risk taking, 162 internalizing risk subsidy, 137-44 Minneapolis Plan to end, evaluation, 123-31

questionable link to surcharge, 130 response of regulatory reform, 214 studies estimating subsidies, 143 and subordinated debt, Basel III on, 139 “too much finance” studies, 191

literature survey, 177 plausibility, 182-84 as statistical illusion, 207 total assets

nonperforming assets and charge-offs as fraction of, 152

risk-weighted assets vs., 12-16, 23 total loss-absorbing capacity (TLAC), 1,

9-11, 118, 133, 205, 210 benefits, 150-51 impact estimates, 149-51 literature survey, 134-51 panic dynamics and, 148-49 shortfalls from target, 46n target, 19

total tier 1 capital, 53n

Tracey, Belinda, 10, 146-47, 162

Traina, James, 10, 140-41 transient analyses, 21 transient estimates, 41-47 translog cost function, 147 translog production function, 145, 145n Travelers Group, Citigroup merger with,

155

Treasury inflation-protected (TIP) five-year bonds, 62

Troubled Asset Relief Program (TARP), 138, 159, 213

Tsatsaronis, Kostas, 69, 80

Turner, C., 144

Turner, Paul, 34

UBS, 213

UniCredit Group, 169

UnionBanCal, 65n

unit cost of equity capital, 7, 65-66, 108 base value, 25n cost to economy, 131 relationship to debt to equity ratio, 85f

United Commercial, 154n

United Kingdom

costs and benefits of higher capital requirements for banks, 37

Financial Services Authority, 126 long-term loss from banking crisis, 37-38

model of optimal capital requirements for economy, 35

output loss estimates from banking crises, 93t

R&D technicians, and growth, 180 United States

average real per capita GDP, 188n output loss estimates from banking crises, 93t

private credit, 186

University of Groningen, 199

US banks

capital ratios and Basel III requirements, 119-20

capitalization improvement, 169 decline in size, 215

vs. European banks, 16-18 large vs. small, 212 lending rates, 78f optimal capital range, 113 risk-weighted assets/total assets ratio, 15 share in US and other countries, 154-56 total assets of commercial, 212n trends in averages of ratios, 62

US Department of Justice, fine for misleading investors in mortgage- backed securities, 166

US Treasury

10-year bond rate, 89n

money market funds guarantee, 159

Valencia, Fabian, 28

Van den Heuvel, S.J., 32, 51

vector autoregression and vector error correction approach, 34, 35

Veron, Nicolas, 113

Vlcek, J., 44-45

volatility, of banking stocks, 138

Volcker rule, 1, 53

Wachovia, 154

and Wells Fargo, 137-38

Warburton, A. Joseph, 143

Warner, Andrew, 187

Washington Mutual, 154 weighted average cost of capital (WACC),

79, 104

Weil, David N., 187

Wells Fargo, 155 risk-weighted assets, 13 and Wachovia, 137-38

WesternBank, 154n

Wheelock, D.C., 10, 144-45, 146, 162 on output and inputs, 148

Willison, Matthew, 143, 144, 162

Wilson, P.W., 10, 144-45, 146 working-age population, 88-89

average annual growth, 94

World Bank, World Development Indicators, 199

Yan, Meilan, 34

Yang, Jing, 5-6, 8, 30, 54n, 69, 79, 80, 106, 114-15, 128, 150

z-scores, 10

as measure of risk, 140