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BASEL III: Long-term impact on economic performance and fluctuations

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Author Info

  • Angelini, P.
  • Clerc, L.
  • Cúrdia, V.
  • Gambacorta, L.
  • Gerali, A.
  • Locarno, A.
  • Motto, R.
  • Roeger, W.
  • Van den Heuvel, S.
  • Vlcek, J.

Abstract

We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of the reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).

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Bibliographic Info

Paper provided by Banque de France in its series Working papers with number 323.

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Length: 27 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:bfr:banfra:323

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Postal: Banque de France 31 Rue Croix des Petits Champs LABOLOG - 49-1404 75049 PARIS
Web page: http://www.banque-france.fr/
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Keywords: Basel III; countercyclical capital buffers; financial (in)stability; procyclicality; macroprudential policy.;

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References

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  1. Scott Roger & Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 11/103, International Monetary Fund.
  2. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research 146, National Bank of Belgium.
  3. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, 09.
  4. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  5. Skander Van den Heuvel, 2005. "The Welfare Cost of Bank Capital Requirements," 2005 Meeting Papers 880, Society for Economic Dynamics.
  6. Denis Beau & Christophe Cahn & Laurent Clerc & Benoît Mojon, 2013. "Macro-Prudential Policy and the Conduct of Monetary Policy," Working Papers Central Bank of Chile 715, Central Bank of Chile.
  7. Dellas, H. & Diba, B. & Loisel, O., 2010. "Financial Shocks and Optimal Policy," Working papers 277, Banque de France.
  8. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
  9. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
  10. Jeanne, Olivier & Korinek, Anton, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," CEPR Discussion Papers 8015, C.E.P.R. Discussion Papers.
  11. Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," Cahiers de recherche 1140, CIRPEE.
  12. Angelini, Paolo & Neri, Stefano & Panetta, Fabio, 2012. "Monetary and macroprudential policies," Working Paper Series 1449, European Central Bank.
  13. Paolo Angelini & Andrea Enria & Stefano Neri & Fabio Panetta & Mario Quagliariello, 2010. "Pro-cyclicality of capital regulation: is it a problem? How to fix it?," Questioni di Economia e Finanza (Occasional Papers) 74, Bank of Italy, Economic Research and International Relations Area.
  14. Enrique G. Mendoza & Javier Bianchi, 2011. "Overborrowing, Financial Crises and ‘Macro-prudential’ Policy?," IMF Working Papers 11/24, International Monetary Fund.
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