Bank capital requirements would entail large social costs if they made resource allocation suboptimal and banking services costly by unduly limiting the banks' ability to lend. This paper considers three main factors that may make capital requirements relevant, namely, deposit insurance...

This paper analyzes the effect of asymmetric information on investment efficiency and the ways in which government credit can mitigate the inefficiency caused by asymmetric information. The inefficiency caused by asymmetric information critically depends on the way in which the project return is...

To infer whether banks really over-tighten lending standards during a credit crunch, this paper examines how future loan performance was related to loan growth and capital ratios during the credit crunch of the early 1990s. The main finding is poorer future loan performance for banks that...