Tags: Basel | Bank | Rules | Modest | Impact | Growth

Basel Bank Rules to Have ‘Modest Impact’ on Growth

Friday, 17 Dec 2010 02:33 PM

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 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 be up to 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.

Insolvency Protection

Regulators are overhauling bank liquidity and capital 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 rules could further reduce growth if banks implement them faster than required, the regulators said.

“A faster implementation period would lead to a slightly larger reduction from the baseline path” the Basel committee and FSB said.

Overall growth would be trimmed by 0.25 percent if the rules are implemented over four years, and 0.29 percent if implemented over two years, the regulators said.

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