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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.

Suggested Citation

  • James B. Thomson, 2001. "PSAF, economic capital, and the new Basel Accord," Working Papers (Old Series) 0111, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:0111
    DOI: 10.26509/frbc-wp-200111
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    References listed on IDEAS

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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.
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    Cited by:

    1. Barnes, Michelle L. & Lopez, Jose A., 2006. "Alternative measures of the Federal Reserve Banks' cost of equity capital," Journal of Banking & Finance, Elsevier, vol. 30(6), pages 1687-1711, June.

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