Rightsizing Bank Capital: The Role of Macrofinancial Structure

Niall McInerney, Martin O’Brien, Michael Wosser and Luca Zavalloni
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Niall McInerney: Central Bank of Ireland
Martin O’Brien: Central Bank of Ireland
Michael Wosser: Central Bank of Ireland
Luca Zavalloni: European Stability Mechanism

International Journal of Central Banking, 2026, vol. 22, issue 2, 351-397

Abstract: We employ a macroeconomic cost-benefit approach to determine the appropriate tier 1 capital ratio for the banking systems of advanced economies. The macroeconomic costs of higher capital ratios are quantified using structural and semi-structural models of the Irish economy, while the macroeconomic benefits are derived using probabilistic models of financial crises and assumptions about the persistence of resulting output losses. We then examine the role of certain macro-financial characteristics in determining the optimal level of bank capital. Incorporating these characteristics, the “rightsized” level of capital lies in a range of 12.5 to 19 percent.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2026:q:2:a:5

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