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. 2018;154(1):22.
doi: 10.1186/s41937-018-0025-z. Epub 2018 Aug 22.

Optimal equity capital requirements for large Swiss banks

Georg Junge  1 , Peter Kugler  2
Affiliations

Optimal equity capital requirements for large Swiss banks

Georg Junge et al. Swiss J Econ Stat. 2018.

Abstract

Ten years after the worst financial crisis of the post-war period, Switzerland has established a Too-Big-To-Fail (TBTF) framework. Under this framework, the two large Swiss banks are subject to substantial capital requirements. It is not obvious whether the TBTF capital requirements are sufficient to prevent banks from plunging the country into a financial crisis once again. We estimate the social costs and benefits of higher capital requirements for the two large Swiss banks and derive socially optimal capital ratios from the cost-benefit trade-off. Our results show that Swiss TBTF capital requirements still fall short of socially optimal capital ratios.

Keywords: Bank equity capital requirements; Capital structure; Elasticity of substitution; Financial regulation; Translog production function.

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Conflict of interest statement

The authors declare that they have no competing interests.Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Figures

Fig. 1
Fig. 1
Expected annual GDP benefits and trend leverage of large banks. Source: Junge and Kugler (2013), Figure 8
Fig. 2
Fig. 2
Change in expected annual GDP benefits and leverage ratio of large banks in percent
Fig. 3
Fig. 3
Optimal Leverage Ratio LR*, Basel III Tier1, PR=5%
Fig. 4
Fig. 4
Histogram of Basel III Tier1 Optimal Leverage Ratio LR*
Fig. 5
Fig. 5
Cost share of capital, Switzerland 1995-2014. Data source: Capital and Labour income, employment and hours worked, https://data.snb.ch/de/topics/uvo#!/cu. Capital stock, https://www.bfs.admin.ch/bfs/de/home/statistiken/volkswirtschaft/kapitalstock.html
Fig. 6
Fig. 6
Translog estimate of the elasticity of GDP to the price of capital, Switzerland 1995-2014
See this image and copyright information in PMC

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