Examining the Impact of the Proposed Rules to Implement Basel III Capital Standards ”

@inproceedings{DeMarzo2012ExaminingTI,
  title={Examining the Impact of the Proposed Rules to Implement Basel III Capital Standards ”},
  author={Peter M. DeMarzo and Martin F. Hellwig},
  year={2012}
}
We examine the pervasive view that “equity is expensive,” which leads to claims that high capital requirements are costly and would affect credit markets adversely. We find that arguments made to support this view are either fallacious, irrelevant, or very weak. For example, the return on equity contains a risk premium that must go down if banks have more equity. It is thus incorrect to assume that the required return on equity remains fixed as capital requirements increase. It is also… CONTINUE READING