Psaf, Economic Capital and the New Basel Accord

17 Pages Posted: 9 Sep 2001 Last revised: 18 Nov 2007

Date Written: August 2001

Abstract

The 1980 Monetary Control Act requires the 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 is allocated to each service according to its risk.

Keywords: economic capital, hurdle rate, correspondent banking

JEL Classification: G2, L3

Suggested Citation

Thomson, James B., Psaf, Economic Capital and the New Basel Accord (August 2001). FRB of Cleveland Working Paper No. 01-11. Available at SSRN: https://ssrn.com/abstract=282411 or http://dx.doi.org/10.2139/ssrn.282411

James B. Thomson (Contact Author)

University of Akron ( email )

Akron, OH 44325-4803
United States

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