Working Paper 139 - The Macroeconomic Impact of Higher Capital Ratios on African Economies

Giovanni Caggiano and Pietro Calice

Working Paper Series from African Development Bank

Abstract: Motivated by the recent debate on the macroeconomic implications of the new bank regulatory standards known as Basel III, this paper examines the impact of higher capital ratios on aggregate output in a comprehensive panel of African economies. We quantify benefits stemming from lower probability of banking crises due to more stringent capital holdings using a multivariate logit model. Costs, measured as the impact of higher lending rates premia over deposit rates due to higher capital levels on aggregate output, are quantified using panel data models with fixed effects. We find that there are net benefits associated with tightened capital ratios, and conclude that, by strengthening the resilience of its banking systems, the new global standards might lead to long-term welfare gains for African economies..

Date: 2011-11-28
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