Question

“Higher bank capital is always a good thing.” Do you agree with this statement? Why or why not?

Answer 1

Higher bank capital is a good thing as it will help the bank in the below ways:

1. Lower interest payments for the debt obligations as most of the funding comes from higher capital

2. Provides strong cushions against losses as higher capital can consume the losses and the bank does not face any risk

3. From regulatory perspectives, the bank needs to maintain minimum capital ratios. Higher capital than the minimum regulatory requirement projects strong financial health of the bank

However, the higher bank capital might not be a good thing if the capital is spread across multiple shareholders which can result in slow decision making for the company as the various directors appointed by different shareholders might have different opinions on running the business.