Financial Stability Paper No. 35: Measuring the macroeconomic costs and benefits of higher UK bank capital requirements -
Robert Edwards (),
William Francis (),
Katharine Neiss () and
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Martin Brooke: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Robert Edwards: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Rashmi Harimohan: Bank of England, Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
No 35, Bank of England Financial Stability Papers from Bank of England
The baseline bank capital requirements in the United Kingdom are being set to comply with agreed international standards established in Basel III (as implemented in Europe through CRD IV). The minimum Tier 1 requirement to be met at all times is 6% of risk-weighted assets, comprised of at least 4.5% Common Equity Tier 1 and at most 1.5% Additional Tier 1 capital. Internationally-agreed buffers, on top of this minimum, can be used to absorb losses under stress. This paper assesses whether these baseline requirements are appropriate for the United Kingdom, given the characteristics of the banking system and economy, and taking into account other areas of regulatory change such as liquidity requirements, structural reform and, most notably, the recent development of a bank resolution regime and requirements for additional capacity to absorb losses in resolution. In November, G20 leaders endorsed standards agreed by the financial Stability Board for global systemically important banks to meet a minimum amount of Total Loss-Absorbing Capacity (TLAC). In December, the Bank of England will, in line with statutory requirements, consult on proposals for additional loss-absorbing capacity for other UK banks. This paper uses a framework that measures and compares the macroeconomic costs and benefits of higher bank capital requirements. The economic benefits derive from the reduction in the likelihood and costs of financial crises. The economic costs are mainly related to the possibility that they might lead to higher bank lending rates which dampen investment activity and, in turn, potential output.
Keywords: Bank Capital; Bank Supervision; Financial Stability (search for similar items in EconPapers)
JEL-codes: G01 G18 (search for similar items in EconPapers)
Pages: 34 pages
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