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|Title||Bank Capital Requirements and Performance|
|Institution||University of Zurich|
|Faculty||Faculty of Economics, Business Administration and Information Technology|
|Number of Pages||62|
|Abstract Text||This thesis examines the possible effects of stricter capital regulations on banks. Following the history of Basel Accords, the focus of analysis lies on capital supervision and control. An issue for controversial discussions among bankers and academics, Basel III is to be implemented in the coming years as a consequence of the last financial crisis. The core element of the new directive is the requirement to raise the proportion of equity in the bank capital structure. The main reasoning is that equity is the loss-absorbing source of financing and when increased, will help to reduce the probability and severity of systemic risks. This initiative caused an intense opposition from the bankersâ side who claim, equity is too expensive compared to debt. They argue that more equity will negatively affect bank profits, lowering its lending abilities and eventually leading to a credit crunch. The thesis analyses both stand points of the debate with the conclusion that equity funding is not expensive per se. The justification of the opposite opinion can only be true under certain conditions, which include tax deductibility of debt and government guarantees. In this case, the paradoxical nature of government measures becomes obvious: strengthening the rules on capital, at the same time giving incentives to debt financing. Until the internal contradictions are solved and the message of the authorities is clear, the probability that financial institutions become risk-averse and stock up their capital reserves remains low.|