The Bank of England has published Staff Working Paper No. 1,188 on how minimum capital requirements interact with banks’ incentives to invest in process innovation. Extending a standard model of banking competition, the paper finds that effective capital requirements aimed at curbing excessive risk-taking can support, rather than hinder, investment in operational efficiency because prudently run banks can expect to benefit from those efficiency gains over a longer time horizon. In the model, that also weakens moral hazard and can reduce the minimum effective capital requirement needed to prevent excessive risk-taking. The result depends on market conditions. The paper says process innovation lowers the minimum effective capital requirement when competition for insured deposits is not too intense and certain model conditions hold, while stronger competition for deposits increases the capital requirement needed to restrain risk-taking. It also notes that different assumptions, including cases where innovation mainly benefits riskier strategies, could instead imply higher capital requirements. As a staff working paper, it is presented as research in progress to invite debate and does not represent Bank of England policy.
Bank of England2026-06-05
Bank of England staff working paper finds minimum capital requirements can support process innovation and lower optimal capital needs
The Bank of England has published Staff Working Paper No. 1,188 analysing how minimum capital requirements affect banks’ incentives to invest in process innovation. The paper finds that well-calibrated capital requirements can support investment in operational efficiency and weaken moral hazard, but that the impact on the minimum effective capital requirement depends on competition for insured deposits and model assumptions. The authors stress that the paper is research in progress and not Bank of England policy.