The macroeconomic impact of Basel III on the Italian economy
AbstractThis paper provides an assessment of the costs of complying with Basel III for the Italian economy. The main findings are the following. For each percentage point increase in the capital ratio implemented over an eight-year horizon, the level of GDP would decline by 0.00-0.33% (0.03-0.39% if credit rationing is also accounted for), corresponding to a reduction of annual output growth in the transition period of 0.00-0.04 percentage points (0.00-0.05 percentage points if credit rationing is considered as well). Compliance with the new liquidity standards causes an additional slowdown of annual GDP growth of at most 0.02 percentage points. If banks felt forced to speed up the transition to the new capital rules by the beginning of 2013, the fall in output would be larger and would take place beforehand. Long-run costs of achieving the new capital standards are even lower, slightly less than 0.2%; those needed to comply with the target liquidity ratio are of a similar size. The above estimates suggest that the economic costs of Basel III are not huge and become negligible if compared with the potential benefits that can be reaped from reducing the frequency of systemic crises and the amplitude of boom-bust cycles.
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Bibliographic InfoPaper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 88.
Date of creation: Feb 2011
Date of revision:
Basel III; Modigliani-Miller theorem; flow/stock costs of equity finance; capital/liquidity requirements;
Other versions of this item:
- Alberto Locarno, 2011. "The macroeconomic impact of Basel III on the Italian economy," Rivista Bancaria - Minerva Bancaria, Istituto di Cultura Bancaria Francesco Parrillo, issue 5-6, november.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-19 (All new papers)
- NEP-MAC-2011-03-19 (Macroeconomics)
- NEP-RMG-2011-03-19 (Risk Management)
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- Andrea Nobili & Francesco Zollino, 2012. "A structural model for the housing and credit markets in Italy," Temi di discussione (Economic working papers) 887, Bank of Italy, Economic Research and International Relations Area.
- Eufrocinio M. Bernabe, Jr. & Jami’ah Jaffar, 2013. "Gauging the Macroeconomic Impact of Basel III on Malaysia," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp87, June.
- Claudia Miani & Giulio Nicoletti & Alessandro Notarpietro & Massimiliano Pisani, 2012. "Banksâ€™ balance sheets and the macroeconomy in the Bank of Italy Quarterly Model," Questioni di Economia e Finanza (Occasional Papers) 135, Bank of Italy, Economic Research and International Relations Area.
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