Regulatory Alerts2022-05-17
Capital review - An updated version of the Harrison model for calculating a bank capital ratio
The Reserve Bank of New Zealand issued this memorandum to present an updated and revised version of the Harrison model used to evaluate the costs and benefits of regulatory bank capital ratios. The analysis recalculates the optimal tier one capital ratio, finding a base case result of approximately 18% compared to the original 13%, while highlighting significant sensitivity to underlying assumptions regarding tax transfers and the Modigliani-Miller theorems. The document concludes that the modelling results are highly uncertain and should not be used to draw definitive conclusions about the precise level of capital required for the banking system.
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