An economic analysis of the banks’ capital ratios
The Riksbank has conducted a study in which it has weighed the long-term social benefits of the banks holding more capital against the social costs. The study indicates that the socially-appropriate capital ratio in the major Swedish banks is somewhere between 10 to 17 per cent of the risk-weighted assets.
The global financial crisis struck with full force just over three years ago and the consequences were enormous. The global economy was thrown into the deepest recession since World War II. One important reason why the consequences were so serious is that the banks had too little capital as a buffer to cope with the situation that arose, and the capital was of poor quality.
Extensive international work is now underway to strengthen the banking sys-tems and stricter capital requirements are an important part of this work. A number of international studies have been conducted in recent years on what capital ratios are socially-appropriate. However, none of these studies has aimed to analyse the conditions prevailing in the Swedish banking sector. The Riksbank has therefore conducted a study in which the social benefits of higher capital ratios have been weighed against the social costs. The aim has been to determine the socially-appropriate capital ratio for Swedish banks.
Although the calculations are uncertain, they nevertheless indicate that the socially-appropriate capital ratio for Swedish banks is higher than the minimum requirements stipulated in the new regulatory framework for banks (Basel III).
