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PSAF, economic capital, and the new Basel Accord

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  • James B. Thomson

Abstract

The 1980 Monetary Control Act requires 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 were allocated to each service according to its risk.

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File URL: http://www.clevelandfed.org/Research/workpaper/2001/Wp0111.pdf
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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 0111.

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Date of creation: 2001
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Handle: RePEc:fip:fedcwp:0111

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Keywords: Bank capital ; Banks and banking - Accounting;

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  1. Jose A. Lopez, 2001. "Federal Reserve banks' imputed cost of equity capital," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue aug10.
  2. Edward J. Green & Jose A. Lopez & Zhenyu Wang, 2001. "The Federal Reserve banks' imputed cost of equity capital," Working Paper Series 2001-01, Federal Reserve Bank of San Francisco.
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Cited by:
  1. Michelle L. Barnes & Jose A. Lopez, 2005. "Alternative measures of the Federal Reserve banks' cost of equity capital," Public Policy Discussion Paper 05-2, Federal Reserve Bank of Boston.

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