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New Banking Rules Will Boost Canada's Economy Over Time, Central Bank Says
Canada’s economy will benefit from new proposed banking regulations as the reduced likelihood and impact of future crises offset the impact of higher borrowing costs, the Bank of Canada said in a report today.
The central bank estimated the country’s gross domestic product would be initially cut by a maximum 0.3 percent if capital ratios were increased by 1 percentage point over a four- year transition period. That drop in output would be 0.5 percent under a two-year phase-in period, it said.
These costs would be outweighed by the long-term benefits of avoiding future crises, according to the report. A two-percentage point increase in capital ratios would cost 8.6 percent of GDP, compared to long-run benefits of 21.6 percent. That would leave a long-term net benefit of C$200 billion ($194 billion) for Canada, it said.
The report assumes the Bank of Canada would offset the impact of higher borrowing costs for lenders to keep inflation on target, it said.
It is “clearly in Canada’s interest to work with other countries to develop stronger international capital and liquidity standards,” Governor Mark Carney said in a statement from Ottawa. “This will improve the robustness of our own banking system, and contribute to the promotion of global financial stability.”
The Bank of Canada estimates that a 2 percentage-point increase in capital requirements, coupled with new liquidity standards, would prompt banks to raise Canadian lending spreads by about 42 basis points.
‘Modest’ Impact
The Bank of Canada’s study follows a report earlier today by the Basel Committee on Banking Supervision which also said the impact of proposed regulations would be “modest.” The Basel committee, which represents central banks and regulators in 27 nations and sets capital standards for banks worldwide, was asked by G-20 leaders to draft rules after the worst financial crisis in 70 years.
The committee softened some of its suggested rules on capital and liquidity last month while introducing new restrictions on how much lenders can borrow as part of an effort to rein in their risk-taking. The panel agreed to allow certain assets, including minority stakes in other financial firms, to count as capital. It also set a leverage ratio to apply to banks globally for the first time, which could become binding by 2018, pending further adjustments to the method of calculating banks’ assets.
The studies released today follow suggestions from banks including Deutsche Bank AG and Bank of America Corp. that a rush to regulate may force them to cut lending, jeopardizing the economic recovery. The committee is seeking to frame the debate as the Group of 20 nations face a November deadline for outlining new rules after the worst financial crisis since the 1930s.
To contact the reporters on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net
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