Sept. 24 (Bloomberg) -- U.S. banks won’t reduce lending if they are required to increase capital because the additional cushion for losses will lower their cost of funds, according to a paper by the Pew Financial Reform Project.

Banks would maintain lending volume and raise capital rather than reduce assets to achieve the required capital ratios, according to the paper by Douglas Elliott, a fellow in economic studies at the Brookings Institution in Washington.

The analysis suggests that regulators may be able to force lenders to hold more capital without depriving consumers and businesses of credit. At the Group of 20 meeting in Pittsburgh beginning today, President Barack Obama will seek a consensus on setting higher capital requirements for lenders.

“Capital has a huge effect on the safety of a bank,” Elliott said in an interview. “They should have lower cost of funds in terms of debt and even deposits because it’s a safer bank.”

Elliott’s analysis differs from a paper written jointly by economists at the U.K.’s Financial Services Authority and the U.S. Federal Reserve Board of Governors, which estimated higher global capital rates may reduce British lending by 5.2 percent over the next 10 years.

Investors will also demand lower returns on equity because the banks are less risky, Elliott wrote. The lower costs of funding, along with reductions in administrative costs and the credit spread, will limit the rise in loan rates, according to the paper.

Basel Committee

A panel of central bankers and regulators that oversees the Basel Committee on Banking Supervision this month agreed on new standards calling for lenders to raise the quality of their capital, introduce a leverage ratio and devise ways to boost reserves when the economy is robust.

“Strengthening capital requirements is an essential part of a broader effort to modernize our regulatory framework,” Treasury Secretary Timothy Geithner wrote in the Financial Times on Sept. 4. “That is the most effective way to prevent the world from reliving the events of last autumn.”

The Pew Financial Reform Project, started by the Philadelphia-based Pew Charitable Trusts, publishes research and features a task force of academics and economists that will make recommendations on regulatory changes.

To contact the reporter on this story: Michael J. Moore in New York at mmoore55@bloomberg.net.

Last Updated: September 24, 2009 00:00 EDT