Staff Memo: Appropriate capital ratios in major Swedish banks – new perspectives

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The authors of a new Staff Memo present new calculations showing that higher capital ratios for the major Swedish banks could be justified because the social benefit be expected to outweigh the social cost. These calculations indicate that an appropriate leverage ratio level for major Swedish banks is somewhere between 5 and 12 per cent.

Higher capital ratios would reduce the probability of a Swedish financial crisis that would entail substantial costs for the economy as a whole. On the other hand, the cost of higher capital ratios for the economy as a whole would be limited. But the calculations are sensitive to what assumptions are made and are thus uncertain.


In 2011, the Riksbank published a study on appropriate capital ratios for Swedish banks, in which the social benefits of higher capital ratios were balanced against possible social costs. Several factors suggest that the socioeconomic benefit of higher capital ratios for banks may have been underestimated. One reason is that previous studies may have underestimated the cost of a crisis to society. The sluggish economic recovery that followed on from the most recent global financial crisis has demonstrated, not least in Europe, the considerable social costs entailed. In addition, earlier studies may have overestimated the possible long-term social costs of higher capital ratios for banks. Several new studies also find that higher capital ratios may be justified.


Against this backdrop, the authors have made new calculations of appropriate capital ratios for the major Swedish banks. The analysis proceeds from the same conceptual framework as the Riksbank Study from 2011, but with the focus now on the leverage ratio instead of measures of risk-weighted capital.


The articles in the Staff Memo were written by Markus Andersson, Daniel Buncic, Cristina Cella, Paolo Giordani, Anna Grodecka, and Gabriel Söderberg. They are all employees at the Financial Stability Department of the Riksbank. The Staff Memo is signed by Kasper Roszbach, head of the Financial Stability Department.

 

Staff Memos are a new form of publication from the Riksbank and a complement to other publications, such as Economic Commentaries and Riksbank Studies. In Staff Memos, Riksbank employees can publish longer analyses in their own names. The opinions expressed in Staff Memos are those of the authors and are not to be seen as the Riksbank's standpoint.

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