An assessment of the long-term economic impact of stronger capital and liquidity requirements
This report provides an analysis of the long-term economic impact (LEI) of the Basel Committee’s proposed capital and liquidity reforms.1 It assesses the economic benefits andcosts of stronger capital and liquidity regulation in terms of their impact on output. The main benefits of a stronger financial system reflect a lower probability of banking crises and their associated output losses. Another benefit reflects a reduction in the amplitude of fluctuations in output during non-crisis periods. In this analysis, the costs are mainly related to the possibility that higher lending rates lead to a downward adjustment in the level of output while leaving its trend rate of growth unaffected. While empirical estimates of the costs and benefits are subject to uncertainty, the analysis suggests that in terms of the impact on output there is considerable room to tighten capital and liquidity requirements while still yielding positive net benefits.
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Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements
The Basel Committee on Banking Supervision and the Financial Stability Board set up the Macroeconomic Assessment Group (MAG) to assess the macroeconomic effects of the transition to strengthened capital and liquidity regulations. The MAG comprises economic modelling experts from central banks and other authorities. In its Interim Report, the MAG concludes that, for each percentage point increase in the target capital ratio implemented over a four-year horizon, the level of GDP relative to the baseline path declines by a maximum of about 0.19%. The maximum GDP loss occurs four and a half years after the start of implementation, after which GDP recovers towards its baseline path. The associated rise in banks’ lending rates would amount to about 15 basis points for each percentage point increase in capital. These costs will slowly dissipate during and after the phase-in, returning GDP to the path it would have followed in the absence of the changes. The impact of the new regulatory framework on specific national financial systems will depend on current levels of capital and liquidity in those systems, and on the consequences of changes to the definitions used in calculating the relevant regulatory ratios. These results imply that the reforms proposed by the Basel Committee are likely to have, at most, a modest impact on aggregate output, provided that appropriate transition arrangements are in place.
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