Bank Rules to Cause ‘Modest’ Interest Rate Rise, IMF Says
New financial regulations will cause a “modest” increase in the interest rates banks charge on loans in developed countries as lenders reduce costs, according to a study by International Monetary Fund staff.
Higher capital and liquidity requirements will boost average bank lending rates in the long term by 28 basis points in the U.S., 18 basis points in Europe and eight basis points in Japan, according to the study published today.
The IMF study found that the increase in lending costs is lower than in studies by the Organization for Economic Cooperation and Development and the Bank for International Settlements. One reason, the IMF staff said, is that their study assumes that a larger portion of the safety margins adopted by banks is voluntary.
“The relatively low levels of economic costs found here strongly suggest that the benefits in terms of less frequent and less costly financial crisis would indeed outweigh the costs of regulatory reforms in the long run,” IMF economist Andre Oliveira Santos and Douglas Elliott, a fellow at the Brookings Institution who worked as a consultant for the IMF, wrote in the report.
“Banks around the world appear to have a considerable ability to adapt to the regulatory changes without radical actions that would harm the wider economy.”
The study’s authors contrasted their work with findings of the Institute of International Finance. In a 2011 report, the industry group that represents more than 450 firms estimated that financial reforms would reduce gross domestic product by 3.2 percent through 2015 and employment by 7.5 million in developed countries.
“The IIF baseline appears to correspond more with the levels of safety margins held pre-crisis than it does with the levels banks would choose to hold in light of the lessons learned from the financial crisis,” according to the IMF study.
The IMF report, titled “Estimating the Costs of Financial Regulation,” assumes that banks will reduce spending and make other adjustments in the response to the new regulations. In the U.S. alone, cost cuts would help reduce lending rates by 15 basis points, according to the study.
The study’s authors also assume that investors will reduce the rate of return they demand on bank equity as a result of improved safety. They stressed the limitations of their report, which doesn’t address the initial costs of adopting the regulations or the economic benefits of financial reform.
There has been progress on developing financial regulations, particularly regarding higher capital and liquidity ratios, IMF Managing Director Christine Lagarde wrote in the September issue of the fund’s “Finance and Development” magazine. “But a better financial architecture is still under construction,” she said.
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