How much capital should banks have?

In a Vox EU column, the IMF's Lev Ratnovski tries to answer the question: "how much capital should banks have?".

His conclusion after studying the level of non-performing loans and then estimating losses in prior economic crises: 9% on a simple leverage ratio basis and 18% under Basel III.

Of course, Mr. Ratnovski assumes that regulators will actually require banks to recognize the losses on their exposure to excess debt.  History shows that this is not the case.

In addition, regular readers know that the amount of capital that each bank should have is the amount of capital that the market requires given the riskiness of each bank's exposures.

So that the market can assess the riskiness of each bank's exposures and exert discipline on each bank to achieve an appropriate level of capitalization, each bank must disclose on an ongoing basis its current global asset, liability and off-balance sheet exposure details.

During the early 1900s when banks were required to disclose their exposure details, market discipline on the banks resulted in an average simple leverage ratios that exceeded 10%.  A level that is consistent with Mr. Ratnovski's analysis.