That is: yt = y̅t − δk − γ(k)Δ(k) This captures the view that higher bank capital could reduce credit supply, and hence economic activity, in the near term. But by making the financial system more resilient to future shocks, it may also reduce the tail risk of bad macroeconomic outcomes. Both probability and severity of crises are influenced negatively by the level of bank capital, with the relationship likely to be convex (γ′ (k) < 0, γ′′ (k) > 0, ∆′ (k) < 0, ∆′′ (k) > 0) – that is to say, one would expect a one percentage point increase in the capital ratio to have a larger dampening impact on the probability and severity of crisis when banks are close to their regulatory minima than when capital buffers are plentiful. In this stylised set-up, the marginal condition that defines optimal bank capital is:  δ = −Δ  ∂γ ∂Δ −γ ∂k ∂k  Optimal capital is higher the lower is δ, the economic cost of a marginal increase in capital requirements; the greater are γ and Δ, the likelihood and severity of crises; and the greater are  ∂γ ∂k  and  ∂Δ ∂k  , the marginal effects  of capital on the likelihood and severity of crises. So what have we learned over the past decade about the likely magnitude of these parameters?
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