The following questions are based on the article Are Higher Capital requirements Worth It?

a. What factors help to determine the optimal capital/asset ratio from the bank managers perspective? How might the optimal amount of capital differ from other private nonfinancial firms?

b. Will the banks optimal capital ratio be the same as the regulators? Why or why not?

c. According to the authors, describe how increasing capital requirements can affect the economy. That is, what are the three main channels by which these capital regulations impact the economy? What do the authors find in their empirical research regarding the effect of higher capital requirements on the economy?

d. How would you respond to the question: Are these higher capital requirements worth it?