The Cost of Doubling Bank Capital in ASEAN-5

This paper quantifies the effect of doubling bank capital in ASEAN-5. This means doubling the percent of equity of total assets from just below 10 percent to 20 percent, or halving the leverage ratio from just above 10 to 5. As equity is more expensive than debt, increasing bank capital increases the cost of doing business which decreases investment and which decreases aggregate output. Hence, the main cost of doubling bank capital is it decreases aggregate output. The question is whether the cost is worthy of spending and the usual answer depends on the benefit. Where benefit is the expected loss that the economy avoids from financial crises and where there is absence in historical data, estimation of benefit is not possible. Still, comparing the cost of doubling capital with one's confidence of financial crisis not happening in a determined number of years can give one the idea whether the cost is worthy of spending.