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Assessing the Economy-wide Impacts of Strengthened Bank Capital Requirements in Indonesia using a Financial Computable General Equilibrium Model

Author

Listed:
  • Arief Rasyid
  • Jason Nassios
  • Elizabeth L Roos
  • James Giesecke

Abstract

After the 2008 global financial crisis, authorities across the globe stressed the importance of equity capital to absorb losses. While many countries have raised bank capital adequacy requirements (CARs), the comprehensive impact assessment of this policy for emerging economies remains largely unexplored. We use a financial computable general equilibrium (FCGE) model of Indonesia called AMELIA-F to investigate the economy-wide impact of a 100 basis points increase in the CAR of Indonesian banks. We find that this causes small negative consequences on the economy. Bank balance sheets contract as they move away from holding riskier assets. This reduces investment in both non-housing and housing sectors, as equity financing raises banks weighted average costs of capital (WACC). The fall in real investment decreases foreign financing needs.

Suggested Citation

  • Arief Rasyid & Jason Nassios & Elizabeth L Roos & James Giesecke, 2021. "Assessing the Economy-wide Impacts of Strengthened Bank Capital Requirements in Indonesia using a Financial Computable General Equilibrium Model," Centre of Policy Studies/IMPACT Centre Working Papers g-316, Victoria University, Centre of Policy Studies/IMPACT Centre.
    • Handle: RePEc:cop:wpaper:g-316
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    Keywords

    Financial CGE model; weighted average cost of capital; capital adequacy ratio; macro prudential policy; Indonesia;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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