IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Optimal Regulation of Bank Capital and Liquidity: How to Calibrate New International Standards

  • Ray Barrell

    (National Institute of Economic and Social Research)

  • E Philip Davis

    (National Institute of Economic and Social Research and Brunel University)

  • Tatiana Fic

    (National Institute of Economic and Social Research)

  • Dawn Holland

    (National Institute of Economic and Social Research)

  • Simon Kirby

    (National Institute of Economic and Social Research)

  • Iana Liadze

    (National Institute of Economic and Social Research)

Raising capital adequacy standards and introducing binding liquidity requirements can have beneficial effects if they reduce the probability of a costly financial crisis, but may also reduce GDP by raising borrowing costs for households and companies. In this paper, we estimate both benefits and costs of raising capital and liquidity, with the benefits being in terms of reduction in the probability of banking crises, while the costs are defined in terms of the economic impact of higher spreads for bank customers. We note that both of these results are contrary to the Modigliani-Miller theorem of irrelevance of the debt-equity choice. The result shows a positive net benefit from regulatory tightening, for a range of 2-6 percentage points increase in capital and liquidity ratios, depending on underlying assumptions.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

Paper provided by Financial Services Authority in its series Occasional Papers with number 38.

in new window

Length: 57 pages
Date of creation: Jul 2009
Date of revision:
Handle: RePEc:fsa:occpap:38
Contact details of provider: Postal: 25 The North Colonnade, Canary Wharf, London E14 5HS
Phone: +44 (020) 7066 1000
Fax: +44 (020) 7066 1099
Web page:

More information through EDIRC

No references listed on IDEAS
You can help add them by filling out this form.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:fsa:occpap:38. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria-Jose Barbero)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.