Working paper

The costs and benefits of financial regulation: A financial CGE assessment of the impact of a rise in commercial bank capital adequacy ratios

30 Apr 2016
DOI

http://doi.org/10.4225/50/58225bfd7986e
Description

Financial regulators in Australia and overseas are requiring banks to raise additional capital. 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.

Publication Details
Identifiers: 
DOI: 
10.4225/50/58225bfd7986e
Published year only: 
2016
16
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