Estimating the optimal capital adequacy level for Ukrainian banking sector

This study presents estimates of the aggregate theoretically optimal capital adequacy level for the Ukrainian banking sector, calculated using a cost–benefit approach, which implies measuring the net effect of higher capital levels on the economy. The net effect is treated as the difference between expected macroeconomic benefits of raising capital and associated macroeconomic costs. The benefits are considered from the perspective of reducing the probability of a crisis occurring. The costs arise from the possibility that tighter capital requirements lead to a slowdown in real GDP growth due to the contraction of the lending supply. The results suggest that the optimal level of aggregate Tier 1 capital to risk-weighted assets ratio for Ukrainian banks is in the range of 9%–15%, which is understood to mean a certain capital ‘safety cushion’ for banks, rather than a regulatory minimum.