Could stronger capital requirements have negative effects on the Finnish economy? : Estimating the impact of implementing Basel III
Granlund, Alexandra (2020)
Granlund, Alexandra
Åbo Akademi
2020
Julkaisu on tekijänoikeussäännösten alainen. Teosta voi lukea ja tulostaa henkilökohtaista käyttöä varten. Käyttö kaupallisiin tarkoituksiin on kielletty.
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2020042220019
https://urn.fi/URN:NBN:fi-fe2020042220019
Tiivistelmä
The purpose of this thesis is to examine the macroeconomic effects of implementing the Basel III capital requirements in the Finnish economy, to conclude whether the effects could be different from what the Basel committee estimates in their long-term economic impact study (BCBS, 2010). The thesis applies the theoretical framework of optimal bank capital from the BCBS 2010 report, to increase the comparability of the results.
The cost of increasing the bank capital requirements in Finland is estimated using a dynamic stochastic general equilibrium (DSGE) model created by the Bank of Finland (Suomen Pankki). The model, named Aino 2.0, features a complex banking sector with bank capital requirements, making it possible to impose shocks directly to the requirements. The benefit of increasing the bank capital requirements in Finland cannot be estimated using the same DSGE model; instead, the analysis is conducted as a literature overview.
The results of the macroprudential policy simulations imply that the output drag could be smaller in Finland than the BCBS (2010) average. However, the small output drag could partly be explained by the lack of household debt in the Aino 2.0 model. The literature overview implies that the reduced crisis probability might be smaller in Finland than the BCBS (2010) average, because of the low risk profile and loan losses of the Finnish banking sector. However, the high levels of systemic risk in the Finnish economy suggest that the cost of crisis could be much larger than the BCBS (2010) average.
All in all, it is difficult to conclude the optimal level of bank capital in Finland without any exact estimates of the benefit of bank capital. Nevertheless, the results of this study suggest that there is still room to strengthen the bank capital requirements in Finland, from the Basel II level.
The cost of increasing the bank capital requirements in Finland is estimated using a dynamic stochastic general equilibrium (DSGE) model created by the Bank of Finland (Suomen Pankki). The model, named Aino 2.0, features a complex banking sector with bank capital requirements, making it possible to impose shocks directly to the requirements. The benefit of increasing the bank capital requirements in Finland cannot be estimated using the same DSGE model; instead, the analysis is conducted as a literature overview.
The results of the macroprudential policy simulations imply that the output drag could be smaller in Finland than the BCBS (2010) average. However, the small output drag could partly be explained by the lack of household debt in the Aino 2.0 model. The literature overview implies that the reduced crisis probability might be smaller in Finland than the BCBS (2010) average, because of the low risk profile and loan losses of the Finnish banking sector. However, the high levels of systemic risk in the Finnish economy suggest that the cost of crisis could be much larger than the BCBS (2010) average.
All in all, it is difficult to conclude the optimal level of bank capital in Finland without any exact estimates of the benefit of bank capital. Nevertheless, the results of this study suggest that there is still room to strengthen the bank capital requirements in Finland, from the Basel II level.