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The Economy-wide Impact of a Rise in Commercial Bank Capital Adequacy Ratios

James Giesecke, Peter Dixon and Maureen Rimmer

Centre of Policy Studies/IMPACT Centre Working Papers from Victoria University, Centre of Policy Studies/IMPACT Centre

Abstract: Financial regulators are requiring banks to raise additional equity capital to finance their acquisition of physical assets (e.g. buildings) and financial assets (e.g. loans). The benefits of this are understood in terms of reducing the risk of incurring the significant costs of another financial crisis. But there are potential costs from securing these benefits, in the form of unanticipated macroeconomic impacts as banks reduce leverage ratios. In this paper, we explore the economic consequences of a 100 basis point increase in commercial bank capital adequacy ratios using a financial computable general equilibrium model of the Australian economy. We find that the macroeconomic consequences of the policy are small. Our results suggest that prudential regulators can move forward to secure the financial system stability benefits that they expect from higher capital adequacy requirements, without concern that significant costs will be imposed on the wider economy in the form of macroeconomic disruption.

Keywords: Capital adequacy ratio; financial stability; macroeconomic disruption (search for similar items in EconPapers)
JEL-codes: E17 E44 G21 C68 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-rmg
Date: 2016-05
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Published in Giesecke, J.A., P.B. Dixon, M.T. Rimmer. (2017), “The economy-wide impacts of a rise in the capital adequacy ratios of Australian banks”, The Economic Record 93(S1), pp.16-37.

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