The Financial System Inquiry ( Fsi )

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The Financial System Inquiry (FSI) acts as a model for achieving a resilient and efficient financial system, contributing to Australia’s economic growth. The Capital requirements implemented according to the FSI has potential impacts on Australian banking system:

1. Increase in borrowing cost/ interest rate
The recommendation that banks in Australia are required to hold additional capital would lead to an increase in the borrowing costs. Furthermore, the requirement of capital held in banks must be of a higher quality makes capital more expensive (FSI 2013). A 1% point increase in capital requirements is estimated to raise average interest on loan by less than 10 basis points, assuming that full cost is passed on to consumers (Mitchell 2013). In relation to that, Australia banks have to come up with repricing strategies to pass on the cost to consumers. However, the actual change in lending interest rates would be lower in a competitive market because RBA has can lower the cash rates in critical conditions. An increase in interest rate would lower real GDP by less than 0.1% points (Mitchell 2013).
2. Foregone opportunity cost
The higher capital requirements would imply that banks need to use more capital funding and place larger constraints on banks’ sources and usage of funding (The banking system 2013). This would limit or forego banks opportunity to finance new projects (FSI 2013).
3. Reduced risk premium
On the bright side, the tighter capital regulations would reduce

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