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PSAF, economic capital, and the new Basel Accord

James Thomson ()

No 111, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: The 1980 Monetary Control Act requires Reserve Banks to recover their costs of providing payments services over time, including a normal return on capital-that is, the same after-tax return on equity that a private firm would require. To date, this private-sector adjustment factor has been estimated and applied as a single hurdle rate for all Reserve Bank payments services. Capital budgeting theory suggests that firms should use a different hurdle rate for each distinct type of activity according to its risks. For Reserve Bank payments services, this might entail estimating separate private-sector adjustment factors for paper-based services and for electronic services. Alternatively, a single hurdle rate of capital could be used for all services if capital were allocated to each service according to its risk.

Keywords: Bank capital; Banks and banking - Accounting (search for similar items in EconPapers)
Date: 2001, Revised 2001
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