Bank capital is funding, but can't always be lent
Time and again, various academic publications explain to us that bank capital is actually cash funding, and therefore higher capital requirements do not constrain lending, in fact they help banks lend more. This underlying opinion, barely disguised behind a cynical tone, is that bankers do not understand capital is funding. I am afraid the issue is more that most non-bankers do not seem to realise that raising capital requirements and raising capital are not the same thing, but opposing factors which cancel each other out. I will demonstrate that with a simple example below. The conclusion is that capital raised because of increasing capital requirements is funding which can't be used for more lending. Let's start with a bank which has 100 in loans, and a capital requirement of 10%. So its liabilities are 10 in capital and 90 in client balances. Now the authorities raise capital requirements to 15%. Suppose the bank goes out and raises that extra 5 in capital. Now its liabi