For example, a firm with a strong traditional lending franchise with appropriate risk management can both build capital organically through retained earnings and serve its customers through the efficient provision of financial services. Similarly, a firm that diversifies into a broader portfolio of financial products may reap the benefits of economies of scope and diversification, while better serving its clients’ needs. This would support both enhanced safety and soundness and the broader objective of effective financial intermediation. There may be times, however, when these two objectives appear to contradict. For example, a firm holding a large buffer of low return, highly liquid assets might be stronger from a liquidity perspective, but might have less lending capacity. Similarly, greater oversight and controls around a particular activity may lower the associated risk, but could also reduce the provision of that financial service. Finally, higher levels of capital may increase the weighted average cost of funding, which could prompt banks to reduce the supply of certain financial services. The latter 5 2/7  BIS central bankers' speeches  point remains an area of active research without a strong consensus.5 This suggests the potential for a trade-off between resilience and intermediation, implying an “optimal” level of capital. This simple, static framing, however, is incomplete and requires further elaboration in terms of the policy horizon and a broad perspective on costs and benefits.
For alternative views on this topic, see “Higher Bank Capital Requirements Would Come at a Price,” Douglas Elliott, Brookings Report, February 20, 2013 and “The Miss Opportunity and Challenge of Capital Regulation,” Anat Amati, National Institute Economic Review, February 2016. 6 Federal Reserve, OCC, and FDIC Release Results of the Supervisory Capital Assessment Program, May 7  2009. 7 "The Theory and Practice of Supervision,” Kevin J. Stiroh, April 11 2016, describes the role of externalities in  supervision in the broader context of market frictions. 8 "Have Big Banks Gotten Safer,” Summers, Lawrence H. and Natasha Sarin, Brookings Papers on Economic  Activity, Fall 2016. 9 Net liquid assets are defined to include cash, central bank reserves, federal funds, net reverse repos, and  certain U.S. treasury and agency securities. 10 Of course, one could look at a broader range of financial services such as market-making activities, provision of  payment services, or risk transfer activities. 11 "Small Business Economic Trends,” National Federation of Independent Businesses, December 2016. 12 "Senior Loan Officer Opinion Survey on Bank Lending Practices,” Federal Reserve Board of Governors, October  2016. 13 Level 3 assets are defined as fair-value assets whose value has to be estimated without benefit of observable  inputs 14 ”Agencies Issue Advanced Notice of Proposed Rulemaking on Enhanced Cyber Risk Management Standards,”  Federal Reserve Board of Governors, October 19 2016. 15 "The Opportunities and Challenges of FinTech,” Governor Lael Brainard, December 2, 2016.