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

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  • Paolo Angelini
  • Laurent Clerc
  • Vasco Cúrdia
  • Leonardo Gambacorta
  • Andrea Gerali
  • Alberto Locarno
  • Roberto Motto
  • Werner Roeger
  • Skander Van den Heuvel
  • Jan Vlcek

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 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 Bank for International Settlements in its series BIS Working Papers with number 338.

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Length: 27 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:bis:biswps:338

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Keywords: Basel III; countercyclical capital buffers; financial (in)stability; procyclicality; macroprudential;

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References

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  1. Angelini, Paolo & Neri, Stefano & Panetta, Fabio, 2012. "Monetary and macroprudential policies," Working Paper Series, European Central Bank 1449, European Central Bank.
  2. Roberto Motto & Massimo Rostagno & Lawrence J. Christiano, 2010. "Financial Factors in Economic Fluctuations," 2010 Meeting Papers 141, Society for Economic Dynamics.
  3. Beau, D. & Clerc, L. & Mojon, B., 2012. "Macro-Prudential Policy and the Conduct of Monetary Policy," Working papers, Banque de France 390, Banque de France.
  4. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
  5. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Working Paper Series, Peterson Institute for International Economics WP10-12, Peterson Institute for International Economics.
  6. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
  7. Vasco Cúrdia & Michael Woodford, 2008. "Credit frictions and optimal monetary policy," Working Paper Research, National Bank of Belgium 146, National Bank of Belgium.
  8. 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.
  9. Enrique G. Mendoza & Javier Bianchi, 2011. "Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy?," IMF Working Papers 11/24, International Monetary Fund.
  10. Dellas, H. & Diba, B. & Loisel, O., 2010. "Financial Shocks and Optimal Policy," Working papers, Banque de France 277, Banque de France.
  11. Scott Roger & Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 11/103, International Monetary Fund.
  12. 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, Blackwell Publishing, vol. 42(s1), pages 107-141, 09.
  13. Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," Cahiers de recherche, CIRPEE 1140, CIRPEE.
  14. Skander Van den Heuvel, 2005. "The Welfare Cost of Bank Capital Requirements," 2005 Meeting Papers 880, Society for Economic Dynamics.
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