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

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  • Giesecke, James
  • Dixon, Peter
  • Rimmer, Maureen

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 & Dixon, Peter & Rimmer, Maureen, 2016. "The costs and benefits of financial regulation: A financial CGE assessment of the impact of a rise in commercial bank capital adequacy ratios," Conference papers 332731, Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project.
    • Handle: RePEc:ags:pugtwp:332731
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    1. Glenn Otto, 2007. "Central Bank Operating Procedures: How the RBA Achieves Its Target for the Cash Rate," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 40(2), pages 216-224, June.
    2. Peter B. Dixon & James. A. Giesecke & Maureen T. Rimmer, 2015. "Superannuation within a financial CGE model of the Australian economy," Centre of Policy Studies/IMPACT Centre Working Papers g-253, Victoria University, Centre of Policy Studies/IMPACT Centre.
    3. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
    4. Philip Lowe, 1995. "The Link between the Cash Rate and Market Interest Rates," RBA Research Discussion Papers rdp9504, Reserve Bank of Australia.
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