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Rightsizing Bank Capital for Small, Open Economies

Niall McInerney, Martin O'Brien (), Michael Wosser and Luca Zavalloni
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Niall McInerney: Central Bank of Ireland
Michael Wosser: Central Bank of Ireland
Luca Zavalloni: Central Bank of Ireland

No 4/RT/22, Research Technical Papers from Central Bank of Ireland

Abstract: In a macroeconomic cost versus benefit framework, we determine the appropriate Tier 1 capital ratio for the banking system of advanced economies. Of particular interest is the appropriate bank capital range for countries sharing similar macrofinancial structural characteristics, during times of normal prevailing risk conditions. The characteristics considered include the relative size of the economy, trade and financial openness, the degree to which the country is FDI-dependent and various measures of banking system concentration. We find that, when the prevailing systemic risk environment is neither elevated nor subdued and other critical modelling parameters are set to plausible levels, an appropriate level for the Tier 1 capital ratio in advanced economies can lie in the range of 12% to 20%, with our benchmark estimate being 16%. When considering the additional risk inherent with being a small, open, FDI-reliant economy with a concentrated banking system, this range and benchmark can be up to 1.25 percentage points higher.

Keywords: optimal bank capital; macroprudential policy; macro-financial structure; systemic risk; financial crises; financial regulation. (search for similar items in EconPapers)
JEL-codes: E5 G01 G17 G28 R39 (search for similar items in EconPapers)
Date: 2022-06
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-opm and nep-rmg
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