Riksbank researchers flag benefits of major capital boost

Sweden could benefit from forcing its banks to comply with higher leverage ratios than under current regulations, according to a ‘staff memo’ published today (May 19) by Sveriges Riksbank.

The researchers, from the Riksbank’s financial stability department, estimate the social cost of raising capital requirements is relatively modest, such that it may be worth doing even if the probability of a crisis only falls marginally. Indeed, earlier studies may have underestimated the cost due to the very slow recovery from the global crisis, the authors say.

The study bases its results on the Modigliani-Miller theorem, while accounting for the frictions prevailing in the real world. On this basis, raising the leverage ratio to anywhere between 5% and 12% would be likely to bring net social benefits, the authors say.

“The calculations do, however, involve a large amount of uncertainty,” they add.