Working paper
Attachment Size
apo-nid67374.pdf 2.2 MB

The Australian Financial System Inquiry (FSI) has identified ways to improve the efficiency and resilience of the Australian banking system. In particular, bank capital levels are expected to be unquestionably strong. However, limited empirical guidance on the size of such buffers exists. We analyse the impact of increased capital buffers on system resilience based on confidential data for Australian banks from 2002 to 2014 provided by the Australian Prudential Regulation Authority and annual public accounts from 1981 to 2014 for the top four banks. First, the estimation of banks’ credit losses reveals that future loss rates are positively related to past loss rates, lagged loan growth and are negatively related to the GDP growth rate, deposit ratio, and bank size. Second, by decomposing the loss rates into systematic and systemic model residuals, we simulate distributions of bank losses and financial system losses in Australia for future periods. We quantify the size of capital buffers required to significantly reduce systemic losses.

Publication Details