An overhaul of bank capital rules drawn up by the Basel Committee on Banking Supervision will trim global economic growth by as much as 0.22 percent, which the regulators said was a “modest” amount.
The growth curbs would come over the eight-year transition period during which the rules are implemented, the Basel committee and Financial Stability Board said in a report posted on the Basel committee’s website today.
“The transition to stronger capital standards is likely to have a modest impact on aggregate output,” the Basel committee and FSB said.
Regulators are addressing concerns from lenders and companies that the overhaul, known as Basel III, may force banks to cut lending, jeopardizing the economic recovery. The Institute of International Finance, an industry group, said in June an earlier version of the plans would have left economic output 3.1 percent lower throughout the euro currency zone, U.S. and Japan during the period from 2011 through 2015, compared with a baseline scenario.
The report “leaves quite a lot more to be desired,” Etay Katz, regulatory partner at law firm Allen & Overy LLP in London, said. “I think bankers when they see this will be sceptical of the rigor with which this analysis has been conducted.”
The impact of planned Basel liquidity rules is not taken into account, Katz said.
The Basel committee and FSB’s figures released today update an interim assessment made in August. The regulators estimated then that the overhaul would trim 0.38 percent from gross domestic product in those same areas over 4 1/2 years. The committee has since modified its planned regulations.
Annual growth would as much as 0.03 percentage points below a baseline scenario -- which presumes banks wouldn’t have to comply with the new regulations -- over the eight-year period, the Basel committee and FSB said in today’s report.
Regulators are overhauling bank capital and liquidity requirements because existing rules, known as Basel II, failed to protect lenders from insolvency during the financial crisis. The main elements of the overhaul were approved by leaders of the Group of 20 countries last month.
The Basel committee said yesterday that the rules would have forced financial institutions to raise 602 billion euros ($795 billion) of capital had they been in place at the end of last year.
Today’s report predicts implementation of the overhauled rules during the eight-year timeline regulators set “would result in a maximum decline in the level of GDP, relative to baseline forecasts, of 0.22 percent.”
The FSB and Basel committee said the capital rules would further reduce growth if banks implement them faster than required under Basel III.
“We know the timetable is accelerated,” said Katz, adding that banks are under pressure from markets and some national regulators to raise capital earlier.
Overall growth would be trimmed by 0.25 percent if the rules are implemented over four years, and by 0.29 percent if implemented over two years, the regulators said.
The shorter the implementation period “the bigger the hit you get,” PricewaterhouseCoopers LLP director Patrick Fell said.