Optimal capital ratios for banks in the euro area

Beau Soederhuizen (), Bert van Stiphout-Kramer (), Harro van Heuvelen () and Rob Luginbuhl ()
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Beau Soederhuizen: CPB Netherlands Bureau for Economic Policy Analysis
Bert van Stiphout-Kramer: CPB Netherlands Bureau for Economic Policy Analysis
Harro van Heuvelen: CPB Netherlands Bureau for Economic Policy Analysis
Rob Luginbuhl: CPB Netherlands Bureau for Economic Policy Analysis

No 429, CPB Discussion Paper from CPB Netherlands Bureau for Economic Policy Analysis

Abstract: Capital buffers help banks to absorb financial shocks. This reduces the risk of a banking crisis. However, on the other hand capital requirements for banks can also lead to social costs, as rising financing costs can lead to higher interest rates for customers. In this research we make an exploratory analysis of the costs and benefits of capital buffers for groups of European countries. In this study, we estimate the optimal level of capital for banks in the euro area. As far as we know, we are the first to investigate this for the euro area. The optimal level results from a trade-off between the social costs and benefits of capital requirements. Depending on technical assumptions, we find an optimal capital buffer between 15 and 30 percent. Despite this considerable spread, the estimated optimum is in all cases higher than the current minimum requirements of Basel III. We also find significant heterogeneity in the optimum between euro area Member States. For Member States with a more stable economy and a banking sector that can easily attract funding we find lower optimal capital ratios.

JEL-codes: C33 C54 E44 G15 G21 (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-fdg, nep-isf, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:cpb:discus:429

DOI: 10.34932/yy4h-xp73

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