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Effect of Higher Capital Requirements on the Funding Costs of Australian Banks

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  • James R. Cummings
  • Sue Wright

Abstract

type="main" xml:lang="en"> The 2014 Murray Financial System Inquiry recommends that Australian banks be required to have higher capital levels. This article examines the arguments about the impact of higher capital requirements on banks' funding costs and assesses their relevance to the Australian banking sector. Based on scenario analysis, we estimate that higher capital requirements will result in a modest increase in the borrowing costs faced by bank customers (in the order of 20 basis points annually for a 5 percentage point increase in the ratio of equity capital to bank assets). We discuss other consequences of higher capital requirements for the Australian banking sector.

Suggested Citation

  • James R. Cummings & Sue Wright, 2016. "Effect of Higher Capital Requirements on the Funding Costs of Australian Banks," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 49(1), pages 44-53, March.
    • Handle: RePEc:bla:ausecr:v:49:y:2016:i:1:p:44-53
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    Cited by:

    1. Thi Mai Luong, 2020. "Selection Effects of Lender and Borrower Choices on Risk Measurement, Management and Prudential Regulation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 3-2020.
    2. Christina Bui, 2018. "Bank Regulation and Financial Stability," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 5-2018.
    3. Bui, Christina & Scheule, Harald & Wu, Eliza, 2017. "The value of bank capital buffers in maintaining financial system resilience," Journal of Financial Stability, Elsevier, vol. 33(C), pages 23-40.
    4. Luong, Thi Mai & Pieters, Russell & Scheule, Harald & Wu, Eliza, 2020. "The impact of government guarantees on banks' wholesale funding costs and lending behavior: Evidence from a natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    5. Damilola Oyetade & Adefemi A. Obalade & Paul-Francois Muzindutsi, 2023. "Basel IV capital requirements and the performance of commercial banks in Africa," Journal of Banking Regulation, Palgrave Macmillan, vol. 24(1), pages 1-14, March.

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