Question

logical insight for why high capital requirements may restrict a bank’s access to capital. Also, offer some insight for why high capital requirements for all banks in the U.S. can actually allow the banks easier access to capital. Which of the arguments do you believe?

Answer 1

High capital requirement can take away the capital from the bank that it may have utilized to loan out and earn returns, rather than letting the capital sitting idle. A high capital requirement restricts banks from making out more loans and capital is not utilized. This si also detremental to the economy as idle funds sitting reduce the velocity of the money.To an extent capital requirement is necessary for safety. It prevents banks from making out loans with impunity and protects depositor as well as the economy

High capital requirement will be seen as good fundamental for the bank and the federal reserve would be willing to make loans on easier terms and without much consideration as risk is pretty less with high capital reserve requirement.

The first argument makes more sense because the high capital requirement affects bank's ability and restrict cash in the economy