Skip to main content

Quantifying the impact of higher capital requirements on the Swiss economy

Summary

So far the discussion in Switzerland about the social costs and benefits of higher capital requirements resulting from the new Basel III Accord and the Swiss Too Big To Fail legislation has been heavily qualitative. This paper provides a quantitative view and estimates the long-run costs and benefits of substantially higher capital requirements using empirical evidence on Swiss banks to assess both benefits and costs. The analysis yields two main conclusions. The long-run economic benefits of higher capital requirements are substantial for the Swiss economy leading to a significantly lower probability of banking crises and associated expected losses. In contrast the costs of higher capital requirements as reflected in increased lending spreads and potential output reductions are literally non-existent.

References

  • Admati, A., P. DeMarzo, M. Hellwig, and P. Pfleiderer (2010), “Fallacies, Irrelevant Facts, and Myths in Capital Regulation: Why Bank Equity is Not Expensive”, Stanford University Working Paper No. 86.

  • BIS (July 2009), “Enhancements to the Basel II Framework and Revision to the Basel II Market Risk Framework”, see www.bis.

  • BIS (December 2010 (rev. June 2011)), “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems”, http://www.bis.org/publ/bcbs189.pdf.

  • BIS (August 2010), “An Assessment of the Long-Term Economic Impact of Stronger Capital and Liquidity Requirements”, Basel Committee on Banking Supervision, Bank for International Settlements.

  • BCBS (December 16 2010), “Results of the Comprehensive Quantitative Impact Study”, see www.bis.

  • BIS (2011), “Assessing the Macroeconomic Impact of the Transition to Stronger Capital and Liquidity Requirements”, Basel Committee on Banking Supervision, Bank for International Settlements.

  • Brealey, R.A., S. C. Myers, and F. Allen (2008), Principles of Corporate Finance, 9th Edition, McGraw Hill.

  • Campbell, J. Y. (2002), “Consumption-Based Asset Pricing”, Harvard University, Cambridge. http://post.economics.harvard.edu/hier/2002papers/2002list.html.

  • Elliot, D. J. (2009), “Quantifying the Effects on Lending of Increased Capital Requirements”, Working paper, The Brookings Institution.

  • Elliott, D., S. Salloy, and A.O. Santos (September 2012), “Assessing the Cost of Financial Regulation”, IMF Working Paper.

  • Expertenkommission (30. September 2010), „Schlussbericht der Expertenkommission zur Limitierung von volkswirtschaftlichen Risiken durch Grossunternehmen“.

  • FINMA Erläuterungsbericht (October 21, 2011), „Änderung Eigenmittelverordnung (ERV) und Ausführungsbestimmungen“, http://www.finma.ch/d/regulierung/anhoerungen/Documents/br-erv-20111021-d.pdf.

  • FINMA Annual Report (2011), https://www.finma.ch/e/finma/publikationen/Documents/finma_jb_2011_e.pdf.

  • IMF (2009), “World Economic Outlook, Chapter”, specifically: M. E. Terrones, A. Scott, and P. Kannan, http://www.imf.org/external/pubs/ft/survey/so/2009/res041609b.htm.

  • Institute of International Finance (IIF September 2011), “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework”.

  • Kashyap, K., J. Stein and S. Hanson. (2010) “An Analysis of the Impact of ‘Substantially Heightened’ Capital Requirements on Large Financial Institutions”, Working Paper.

  • McKinsey & Company (September 2011), “Day of Reckoning? New Regulation and its Impact on Capital-Market Business”, http://www.mckinsey.com/App_Media/Reports/Financial_Services/McKRegulation_capital_markets.pdf.

  • Miles, D., J. Yang., and G. Marcheggiano (2011) “Optimal Bank Capital”, Bank of England; External MPC Unit, Discussion paper No. 31.

  • Friedman, M (1953), Essays in Positive Economics, The University of Chicago Press, Chicago 37.

  • Regulierungsgsfolgenabschätzung (March 2011) zur Änderung des Bankengesetzes (too big to fail), http://www.efd.admin.ch/dokumentation/zahlen/00578/02267/index.html?lang=de.

  • Reinhart, C. M., and K. S. Rogoff (2009), “The Aftermath of Financial Crisis”, American Economic Review, 99, pp. 466–472.

    Article  Google Scholar 

  • Ritzman, F. (1973), Die Schweizer Banken, Geschichte— Theorie— Statistik, Bern.

  • SECO (May 15, 2012), „Bericht des Staatssekretariats für Wirtschaft SECO über die Stabilisierungsmassnahmen 2009/2010“.

  • Schweizerischer Bundesrat (2011), „Botschaft zur Änderung des Bankengesetzes (Stärkung der Stabilität im Finanzsektor; too big to fail)“.

  • Schweizerische Nationalbank (2007), The Swiss National Bank 1907–2007, Zürich (Chapter 1 and 7).

  • Sveriges Riksbank (December 2010), “Appropriate Capital Ratio in Major Swedish Banks”.

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Georg Junge.

Additional information

The views expressed in this paper are those of the authors, and not necessarily those of FINMA.

We are grateful to Alain Schönenberger for earlier collaborative work and to Benjamin Junge for comments on preliminary results and the estimation of equity betas. Moreover, we thank Nikiaus Blattner, Petra Gerlach, Yvan Lengwiler Thomas Nitschka, Burkhard Poschadel, Tobias Straumann and seminar participants from FINMA and SNB for useful comments and discussions. Moreover, helpful comments of anonymous referees are gratefully acknowledged.

Rights and permissions

Open Access This article is distributed under the terms of the Creative Commons Attribution 2.0 International License ( https://creativecommons.org/licenses/by/2.0 ), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Reprints and Permissions

About this article

Cite this article

Junge, G., Kugler, P. Quantifying the impact of higher capital requirements on the Swiss economy. Swiss J Economics Statistics 149, 313–356 (2013). https://doi.org/10.1007/BF03399394

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF03399394

JEL-Classification

  • G21
  • G28

Keywords

  • Capital regulation
  • banks
  • cost of equity
  • banking crisis
  • economic growth
  • Modigliani-Miller