If you like your banks boring, well capitalized and also contributing to the real economy, you will be cheered by yesterday's quarterly review from the Bank for International Settlements, which contains a special feature on "How have banks adjusted to higher capital requirements?" That's a much-discussed question with at least two possible bad answers. The banks argue against higher capital requirements by saying it would force them to cut back on lending. I wonder whether higher (risk-weighted) capital requirements will lead banks to just monkey with the models for their risk-weighted assets.
But the BIS's answer is pretty solidly the good answer: Banks have increased capital ratios by retaining more earnings, without cutting back on lending or monkeying too much with the models:
