The Economy-wide Impacts of a Rise in the Capital Adequacy Ratios of Australian Banks

Abstract

Regulators are requiring banks to raise additional equity to finance their activities. The benefits are understood in terms of reducing the risks of another financial crisis. But there are potential costs, including the potential for unanticipated macroeconomic impacts as banks reduce leverage. We use a financial computable general equilibrium model, containing disaggregated treatment of financial agents, to explore the economy-wide consequences of an increase in bank capital adequacy ratios. We find that the macroeconomic consequences are small.