Working Paper: A cost-benefit analysis of capital requirements for the Danish economy

Working Paper - December 2017 - No. 123

Authors Pedersen, Jesper; Mikkelsen, Jakob Guldbæk
Subject Financial stability; Financial regulation
Type Working paper
Year 2017
Published 15 December 2017
We analyze the costs and benefits of increasing capital requirements for Danish banks. Costs are low if banks suspend dividend payments for two years and if investors' required return falls as banks accumulate new capital. An increase of required capital ratio from its current level reduces the probability of financial crises and the long-lasting output costs associated with these. Based on Danish data and using models for the Danish economy, we thus confirm findings in studies for other economies: The benefits outweigh the social costs of increasing capital ratios.