Shareholders and managers of banks may prefer that banks be required to hold higher levels of capital because this would allow for higher share prices for the banks and larger bonuses for bank managers.

Question

Quizplus · Accepted Answer

Higher levels of capital requirements typically mean that banks must hold more equity relative to their assets, which can limit the amount of leverage they can use to amplify returns. This can potentially lead to lower profitability and thus may not directly lead to higher share prices or larger bonuses for managers. Instead, shareholders and managers might prefer lower capital requirements to increase leverage and potential returns.

Shareholders and Managers of Banks May Prefer That Banks Be