Sunday 4 December 2016

Basel: Banking rules will have only modest impact on growth

Boris Groendahl

Published 19/08/2010 | 05:00

New bank rules will cut global output by merely a fraction, which is a "modest" price to pay for greater stability, the Basel Committee on Banking Supervision has said.

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The bodies behind "Basel III" issued a statement dismissing lenders' warnings that growth may be curbed as a result of the new directive.

The rules for banks' capital and liquidity will tighten lending and reduce investment during a transition period, but to a much lower degree than forecast by banks, Basel and the Financial Stability Board (FSB) said yesterday.

"Macroeconomic costs of implementing stronger standards are manageable . . . while the longer-term benefits to financial stability and more stable economic growth are substantial," FSB chairman Mario Draghi said in the statement.

Assuming the rules are phased in over four years, and banks' capital levels rise by 2 percentage points, output would, on average, decline by 0.38pc, compared to a baseline scenario.

This figure was arrived at according to an analysis by the FSB, a body tasked by the G20 to co-ordinate a string of market reforms including Basel III.

Output loss

This is only an eighth of the 3.1pc output loss over five years due to Basel III and other measures which bank lobby group the Institute of International Finance (IIF) has predicted for the United States, the eurozone and Japan.

Once banks have completed the switch, the new rules will help avoid or at least moderate the boom-and-bust cycles that at first pump too much capital into the wrong places and then cause huge output losses when the bubble bursts, Basel said.

Eliminating savage downturns such as that which happened after the 2008 financial crisis could, in the long-term, add as much as 1.8pc economic growth per year, Basel said in a second study trying to gauge the long-term benefits of the new rules. "Economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Basel Chairman Nout Wellink.

"These benefits result not only from a stronger banking system in the long run, but also from greater confidence in the stability of the financial system," he said.

Supervisors

The Basel Committee of global banking supervisors published a draft Basel III reform last December that would force banks to hold more and better quality capital, to withstand future shocks, without taxpayer help, again.

It eased some of the original proposals and said banks would have more time to comply in a revision last month that addressed some concerns that banks have raised.

The Basel and FSB reports corroborate the view that a longer phase-in of the new rules is needed to avoid scuppering the fledgling recovery of the world economy, especially as major economies enter a period of budget austerity.

Basel and the FSB said the banks' assessment of the new rules' impact was over-dramatic because it assumed banks will return to pre-crisis levels for return on equity, and because it compared the impact to pre-crisis debt-bubble practices that were unlikely to return even without new regulation.

Crucial question

A crucial question yet to be answered on Basel III is what minimum level of capital banks will be required to hold in the new system, and what this new regulatory minimum will mean for the -- usually higher -- level that the markets expect.

Another impact study, that has not been published yet, by Basel will calculate where banks' current capital levels are if the new, stricter rules are applied, and what this means for the new level and for capital-raising needs.

Regulatory sources have said that Basel is likely to require banks to hold some 6pc to 8pc of core Tier 1 capital, including a "capital conservation buffer", and, in addition, to have another 2pc "countercyclical buffer".

Irish Independent

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