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Effect of Higher Capital Requirements on the Funding Costs of Australian Banks
Author(s) -
Cummings James R.,
Wright Sue
Publication year - 2016
Publication title -
australian economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.308
H-Index - 29
eISSN - 1467-8462
pISSN - 0004-9018
DOI - 10.1111/1467-8462.12138
Subject(s) - capital requirement , capital adequacy ratio , cost of capital , business , capital (architecture) , equity (law) , basis point , financial capital , relevance (law) , finance , order (exchange) , economic capital , economics , equity capital , interest rate , human capital , capital market , economic growth , microeconomics , archaeology , political science , law , history , incentive , profit (economics)
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.