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Federal Reserve Bank of Cleveland
Working Papers (Old Series)
PSAF, economic capital, and the new Basel Accord
James B. Thomson

The 1980 Monetary Control Act requires Reserve Banks to recover their costs of providing payments services over time, including a normal return on capital-that is, the same after-tax return on equity that a private firm would require. To date, this private-sector adjustment factor has been estimated and applied as a single hurdle rate for all Reserve Bank payments services. Capital budgeting theory suggests that firms should use a different hurdle rate for each distinct type of activity according to its risks. For Reserve Bank payments services, this might entail estimating separate private-sector adjustment factors for paper-based services and for electronic services. Alternatively, a single hurdle rate of capital could be used for all services if capital were allocated to each service according to its risk.

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James B. Thomson, PSAF, economic capital, and the new Basel Accord, Federal Reserve Bank of Cleveland, Working Papers (Old Series) 0111, 2001.
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Keywords: Bank capital ; Banks and banking - Accounting
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