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A Cost-Benefit Analysis of Basel III: Some Evidence from the UK

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This paper provides a long-term cost-benefit analysis for the United Kingdom of the Basel III capital and liquidity requirements proposed by the Basel Committee on Banking Supervision (BCBS, 2010a). We provide evidence that the Basel III reforms will have a significant net positive long-term effect on the United Kingdom economy. The estimated optimal tangible common equity capital ratio is 10% of risk-weighted assets, which is larger than the Basel III target of 7%. We also estimate the maximum net benefit when banks meet the Basel III longterm liquidity requirements. Our estimated permanent net benefit is larger than the average estimates of the BCBS. This significant marginal benenfit suggests that UK banks need to increase their reliance on common equity in their capital base beyond the level required by Basel III as well as boosting customer deposits as a funding source.

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File URL: http://www.lboro.ac.uk/departments/sbe/RePEc/lbo/lbowps/Yan_Hall_TurnerWP5.pdf
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Paper provided by Department of Economics, Loughborough University in its series Discussion Paper Series with number 2011_05.

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Date of creation: Nov 2011
Date of revision: Nov 2011
Handle: RePEc:lbo:lbowps:2011_05

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Keywords: Basel III; Cost-Benefit analysis; Tangible Common Equity Capital; Liquidity;

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  9. Césaire Meh & Kevin Moran, 2008. "The Role of Bank Capital in the Propagation of Shocks," Working Papers, Bank of Canada 08-36, Bank of Canada.
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Cited by:
  1. Jan Novotný & Jan Hanousek & Evžen Kočenda, 2013. "Price Jump Indicators: Stock Market Empirics During the Crisis," William Davidson Institute Working Papers Series wp1050, William Davidson Institute at the University of Michigan.

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