Optimal equity capital requirements for Swiss G-SIBs

This paper extends the analysis of Junge and Kugler (2013) on the effects of increased capital requirements on Swiss GDP and obtains the following main results: First the Modigliani-Miller effect is robust with respect to a substantial extension of the data base and yields an offset of capital cost of 46 percent. Second, the Translog production function estimate results in a time-varying elasticity of production with respect to the price of capital between 0.34 and 0.27, which is substantially lower than the value of 0.43 found in the earlier CES framework. Third the unweighted capital (leverage) ratio for Swiss G-SIBs is approximately 6 percent for Basel III Tier1 and 4.3 percent for CET1. This corresponds to risk-weighted capital ratios of 17 to 20 percent and 13 to 15 percent, respectively. The estimates show that the recently revised Swiss Too-Big-To-Fail capital ratios for G-SIBs are about 30 percent smaller than the optimal levels. However, the oft-debated proposal to raise the equity-to-asset ratio to 20 to 30 percent is not warranted by our analysis.