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What impact do differences in financial structure have on the macro effects of bank capital requirements in the United States and Australia?

Jason Nassios, James Giesecke, Peter B. Dixon and Maureen T. Rimmer

Economic Modelling, 2020, vol. 87, issue C, 429-446

Abstract: We investigate the influence of jurisdictional differences in financial structure on the economic consequences of bank capital regulation. We use two disaggregated financial computable general equilibrium models to compare the impacts of identical increases in bank capital adequacy ratios in the U.S. and Australia. In both models, this raises bank equity financing shares, and lowers banks’ risk-weighted asset holdings. Thereafter however, differences in financial structure drive contrasting outcomes: in the U.S., average costs of capital fall, stimulating real investment, while we find the opposite outcome for Australia. We attribute this to differences in the structure of bank assets (U.S. banks hold more risk-free assets) and the importance of banks as intermediaries (bank finance is more important to capital formation in Australia). This may explain why capital regulations encompass non-banks in the U.S. but not Australia.

Keywords: Macro prudential policy; Capital adequacy ratio; Financial structure; Financial CGE model (search for similar items in EconPapers)
JEL-codes: E17 E44 G21 C68 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.econmod.2019.08.020

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