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Swiss Journal of Economics and Statistics

Table 14 Base case parameter values and alternatives

From: Optimal equity capital requirements for large Swiss banks

Parameter

Description

Base case

Low opt. LR

High opt. LR

M-M offset

Variation of M-M offset: base case, no M-M offset and 67% offset corresponding to minus two standard errors around an estimated parameter value

46%

0%

67%

R p

Equity risk premium

5%/10%

10%

5%

SEF*1PT (full pass through)

Share of non-financial corporates’ financing provided by G-SIBs

10.8%

18.5%

10.8%

SEF*0.5PT (half pass through)

Share of non-financial corporates’ financing provided by G-SIBs

5.4%

9.4%

5.4%

E Y, PK

Elasticity of production with respect to the price of capital

0.31

0.34

0.27

A

Constant of GDP benefit curve and varies with GDP losses of 17.7% (base case), 10% (low LR*) and 28.5% (high LR*)

1.56E−04

8.81E−05

2.51E−04

ρ

Exponent of GDP benefit curve

2.541

2.463

2.619

  1. Explanation of the alternative parameter values:
  2. M-M offset variation: base case 46% offset corresponding to â = 0.8269, of â = 1 (no M-M), â − 2 standard errors 0.5059 (M-M offset is 67%)
  3. Risk premium: lower (5%) bound and upper (10%) bound to take care of the variations of equity risk premiums
  4. SEF*1PT (full pass through): The lower bound of SEF (10.8%) is the share of G-SIBs in external financing of the Swiss corporate sector. The upper bound includes in addition the Swiss D-SIBs Raiffeisenbank and ZKB (The PostFinance, also a D-SIB, is not allowed to provide loans). The market share of Raiffeisenbank in Swiss domestic loans is 13.5% (See SNB Statistik: Bankenstatistisches Monatsheft, Kreditvolumenstatistik.) for period 2012 to 2015 and that of ZKB is 8% (see ZKB: https://www.zkb.ch/media/dok/corporate/medien/praesentation-rudolf-sigg.pdf). These shares must be multiplied with the share of external financing of the corporate sector (35%) and added to 10.8% in order determine the upper bound of SEF of 18.5%.
  5. SEF*0.5PT (half pass through): A half pass through reduces the impact of the average lending rate by 50%.
  6. Production elasticity with respect to the price of capital: The estimations of the translog framework showed that the elasticity varies between 0.27 and 0.34 with a mean and median of 0.31.
  7. A is the constant of the benefit curve and defined as crises probability * GDP loss. The base case GDP loss (17.7% of GDP) and the upper GDP loss (28.5% of GDP) are derived from our historical regression analysis (equation 18). The lower GDP loss of 10% is the ratio of the bank losses of CS and UBS (nearly CHF 60 bn.) to GDP in the financial crisis from 2007/2008.
  8. Exponent ρ: estimate ± 2 standard errors, 2.463 and 2.619
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