Minimal economic costs from higher bank capital 08 December 2014 5:07PM Ian Rogers Murray Inquiry The Financial System Inquiry estimated that a one percentage point increase in capital requirements for banks in Australia would increase the average interest rate on a loan by less than ten basis points.This is a much lower impost than postulated by ANZ's CEO, for example, in the weeks leading up to the final report.The inquiry said its estimate of the effect on loan interest rates was "roughly in the middle of the range found in a number of studies," and verified to some degree by APRA on its behalf."Changing capital requirements only affect a small portion of the funding of a loan," the report noted."For example, a one percentage point rise in capital requirements affects the funding cost of less than 0.5 per cent of the average loan. That is, the funding cost on 99.5 per cent of the loan does not increase, and the incremental cost of equity over debt is only felt on the remaining 0.5 per cent."Changing the cost of this small slice of a loan's funding therefore has a correspondingly small effect on the average funding cost."The reported noted that "RBA staff research suggests that an interest rate increase of this magnitude would reduce real GDP by less than 0.1 percentage points," making it an immaterial impost.