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Why do banks resist capital requirements?

During a recent visit to London, we had the chance to sit down with Thorsten V. Koeppl, an Associate Professor from the economics department at Queen’s University in Ontario. We asked Professor Keoppl how complicated banking regulation really was and why some people are opposed to higher capital requirements.

    

“There’s a huge resistance against raising capital requirements,” argued professor Keoppl, “because it doesn’t allow banks to do what they would like to do which is having a high leverage.”

“The issue with high leverage is that they don’t put any of their own money so to speak at risk but they have a huge upside potential if things go right. The downward potential is very minimal. They have no skin in the game skin in the game and on top of that, by being highly leveraged and also fulfilling a social function for intermediating credit they’re basically playing the game of being constantly bailout by public authorities and state governments.”

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