Effects of Bank Capital Recommendations from the Financial System Inquiry

Project Member(s): Scheule, H.

Funding or Partner Organisation: Centre for International Finance and Regulation (CIFR Funding (Centre of Excellence))
Faculty of Business UTS (Faculty of Business UTS Partnership Fund)

Start year: 2015

Summary: We measure the contribution to financial system resilience of the Financial System Inquiry (FSI) recommendations 1, 2, 3 and 6 in relation to Authorised Deposit-taking Institutions¿ (ADI) capital by the following steps: - Set capital standards such that ADI institution capital ratios are unquestionably strong: Impact analysis of absolute capital levels on system resilience. - Narrow mortgage risk weight differences: Impact analysis of increased risk weights for the Internal Rating-based Approach (IRB) applied by the largest financial institutions. - Loss absorbing and recapitalisation capacity: Impact analysis of capital buffers (as proposed under Basel III) versus hard minimum capital requirements (as included in Basel I to III). - Maintain the ex post funding structure of FCS: Computation of the magnitude of the FCS for the current and alternative (as per FSI recommendations 1-3) regulatory settings. The recommendations are analysed for simulated future loss outcomes, based on (i) estimated sensitivities of bank losses and average bank losses and hence the macro economy, (ii) stressed sensitivities given the existing empirical evidence of other economies, which have been recently exposed to economic downturns. It will also investigate how the impact of changes to capital requirements via banks¿ loss rates will affect the stability of foreign-sourced bank funding. The project will enhance Australia¿s productivity through efficient capital requirements that foster foreign investment and economic growth in its financial services industry.

Publications:

Do, H, Roesch, D & Scheule, H 2018, 'Predicting loss severities for residential mortgage loans: A three-step selection approach', European Journal of Operational Research, vol. 270, no. 1, pp. 245-259.
View/Download from: UTS OPUS or Publisher's site

Kruger, S, Oehme, T, Roesch, D & Scheule, H 2018, 'A copula sample selection model for predicting multi-year LGDs and Lifetime Expected Losses', Journal of Empirical Finance, vol. 47, pp. 246-62.
View/Download from: UTS OPUS or Publisher's site

FOR Codes: Econometric and Statistical Methods, Financial Institutions (incl. Banking), Finance Services