Psaf, Economic Capital and the New Basel Accord
17 Pages Posted: 9 Sep 2001 Last revised: 18 Nov 2007
Date Written: August 2001
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: Suggested Citation