Abstract
We employ a macroeconomic cost-benefit approach to determine the appropriate tier 1 capital ratio for the banking systems of advanced economies. The macroeconomic costs of higher capital ratios are quantified using structural and semi-structural models of the Irish economy, while the macroeconomic benefits are derived using probabilistic models of financial crises and assumptions about the persistence of resulting output losses. We then examine the role of certain macro-financial characteristics in determining the optimal level of bank capital. Incorporating these characteristics, the “rightsized” level of capital lies in a range of 12.5 to 19 percent.
Authors
- Niall McInerney
- Martin O’Brien
- Michael Wosser
- Luca Zavalloni
JEL codes
- E5
- G01
- G17
- G28
- R39