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Rightsizing Bank Capital for Small, Open Economies

Author

Listed:
  • McInerney, Niall

    (Central Bank of Ireland)

  • O'Brien, Martin

    (Central Bank of Ireland)

  • Wosser, Michael

    (Central Bank of Ireland)

  • Zavalloni, Luca

    (Central Bank of Ireland)

Abstract

In a macroeconomic cost versus benefit framework, we determine the appropriate Tier 1 capital ratio for the banking system of advanced economies. Of particular interest is the appropriate bank capital range for countries sharing similar macrofinancial structural characteristics, during times of normal prevailing risk conditions. The characteristics considered include the relative size of the economy, trade and financial openness, the degree to which the country is FDI-dependent and various measures of banking system concentration. We find that, when the prevailing systemic risk environment is neither elevated nor subdued and other critical modelling parameters are set to plausible levels, an appropriate level for the Tier 1 capital ratio in advanced economies can lie in the range of 12% to 20%, with our benchmark estimate being 16%. When considering the additional risk inherent with being a small, open, FDI-reliant economy with a concentrated banking system, this range and benchmark can be up to 1.25 percentage points higher.

Suggested Citation

  • McInerney, Niall & O'Brien, Martin & Wosser, Michael & Zavalloni, Luca, 2022. "Rightsizing Bank Capital for Small, Open Economies," Research Technical Papers 4/RT/22, Central Bank of Ireland.
    • Handle: RePEc:cbi:wpaper:4/rt/22
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    as
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    More about this item

    Keywords

    optimal bank capital; macroprudential policy; macro-financial structure; systemic risk; financial crises; financial regulation.;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G01 - Financial Economics - - General - - - Financial Crises
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • R39 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - Other

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