Basel III: Long-term Impact on Economic Performance and Fluctuations

Using a wide range of macroeconomic and econometric models we assess the long‐term economic impact of the Basel III reform. Our main results are the following. (1) The economic costs of the new regulatory standards for bank capital and liquidity are considerably below existing estimates of the benef...

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Published inThe Manchester school Vol. 83; no. 2; pp. 217 - 251
Main Authors Angelini, Paolo, Clerc, Laurent, Cúrdia, Vasco, Gambacorta, Leonardo, Gerali, Andrea, Locarno, Alberto, Motto, Roberto, Roeger, Werner, Van den Heuvel, Skander, Vlček, Jan
Format Journal Article
LanguageEnglish
Published Manchester Blackwell Publishing Ltd 01.03.2015
Subjects
Capital requirements
Cost benefit analysis
Econometric models
Econometrics
Economic impact
Economic performance
Evaluation
Liquidity
Macroeconomics
Reform
Regulation of financial institutions
Studies
Volatility
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Summary:Using a wide range of macroeconomic and econometric models we assess the long‐term economic impact of the Basel III reform. Our main results are the following. (1) The economic costs of the new regulatory standards for bank capital and liquidity are considerably below existing estimates of the benefits that the reform should have by reducing the probability of banking crises (Basel Committee on Banking Supervision (2010) ‘An Assessment of the Long‐term Impact of Stronger Capital and Liquidity Requirements’, Basel). (2) The reform dampens output volatility modestly, although there is some heterogeneity across models. (3) The adoption of countercyclical capital buffers can substantially amplify the dampening effect on output volatility.
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Appendix S1. Additional information on the models and details on the individual exercises. Part A. Additional information on the models used for the simulations. Table a1. Main characteristics of the model developed in Gerali et al. (2010). Table bf1. Effects of changes in the capital adequacy ratio on real output (deviations from baseline in percentage points). Table bf2. Effects of liquidity and capital requirements on real output. Table c1. Stochastic shocks. Table ei1. Effects on standard deviations (compared with status quo). Table ei2. Standard deviations (normalized by shock size). Table h1. Properties and relative contribution to the volatility in output growth. Part B. Details on the individual exercises. Table B1. Steady-state output loss due to regulatory tightening. Table B2. Change in output standard deviation due to regulatory tightening. Table B3. Change in output standard deviation due to countercyclical capital buffers. Table B4. Steady-state welfare loss due to regulatory tightening in terms of consumption equivalents: model-based measures.
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ISSN:1463-6786
1467-9957
DOI:10.1111/manc.12056