The Importance of Being Prudent : Capital Adequacy, Financial Stability and the Macroeconomy

This monograph analyses the systemic impact of forthcoming provisions under Basel III related to banks' capital adequacy in response to the global economic crisis. The study considers multiple policy channels which aim at achieving substantially higher capital adequacy standards, such as regulatory requirements, market-driven pressures and supervisory contingency stress tests of the banking system, as well as individual banking institutions. The analysis is based on detailed examination of current regulatory overhaul proposals and policy dilemmas, critical review of the empirical and theoretical literature linking macroeconomics and financial intermediation and quantitative impact assessment in the case of the Bulgarian banking system. The latter includes dynamic identification of structural links between Bulgaria and the Euro area and an application of a general equilibrium model, incorporating financial intermediation, heterogeneity and default risk, used for policy evaluation and prudential systemic stress tests