Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards

Ray Barrell, E Davis (), Tatiana Fic, Dawn Holland, Simon Kirby and Iana Liadze

No 38, Occasional Papers from Financial Services Authority

Abstract: Raising capital adequacy standards and introducing binding liquidity requirements can have beneficial effects if they reduce the probability of a costly financial crisis, but may also reduce GDP by raising borrowing costs for households and companies. In this paper, we estimate both benefits and costs of raising capital and liquidity, with the benefits being in terms of reduction in the probability of banking crises, while the costs are defined in terms of the economic impact of higher spreads for bank customers. We note that both of these results are contrary to the Modigliani-Miller theorem of irrelevance of the debt-equity choice. The result shows a positive net benefit from regulatory tightening, for a range of 2-6 percentage points increase in capital and liquidity ratios, depending on underlying assumptions.

Keywords: bank; capital; financial regulation; prudential policy; credit; lending (search for similar items in EconPapers)
Pages: 57 pages
Date: 2009-07
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fsa:occpap:38

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