The Costs and Benefits of Financial Regulation: A Financial CGE Assessment of the Impact of a Rise in Commercial Bank Capital Adequacy Ratios

32 Pages Posted: 18 Apr 2016

See all articles by James Giesecke

James Giesecke

Monash University - Centre of Policy Studies

Peter B. Dixon

Monash University - Centre of Policy Studies

Maureen T. Rimmer

Monash University - Centre of Policy Studies

Date Written: April 17, 2016

Abstract

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.

Suggested Citation

Giesecke, James and Dixon, Peter B. and Rimmer, Maureen T., The Costs and Benefits of Financial Regulation: A Financial CGE Assessment of the Impact of a Rise in Commercial Bank Capital Adequacy Ratios (April 17, 2016). CIFR Paper No. 104/2016. Available at SSRN: https://ssrn.com/abstract=2766097 or http://dx.doi.org/10.2139/ssrn.2766097

James Giesecke (Contact Author)

Monash University - Centre of Policy Studies ( email )

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Peter B. Dixon

Monash University - Centre of Policy Studies ( email )

Clayton, Vic 3800
Australia
+61 3 990 52398 (Phone)

Maureen T. Rimmer

Monash University - Centre of Policy Studies ( email )

Clayton, Vic 3800
Australia
+61 3 990 55464 (Phone)

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