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Basel III: Is the cure worse than the disease?

  • Allen, Bill
  • Chan, Ka Kei
  • Milne, Alistair
  • Thomas, Steve

This paper discusses the economic impact of the Basel III reforms to banking regulation. We find that the long-term impact should be much less than many in the industry fear but the required accompanying changes to business models, business processes and governance, need to be carefully managed to avoid a severe shortage of funding. We agree with critics of Basel III that there is a real danger that reform will limit the availability of credit and reduce economic activity. But the problem is not higher capital and liquidity requirements per se but rather the difficulties of ensuring a coordinated adaption to the new rules across the entire financial services industry. The authorities must use the long period of Basel III implementation to engage both banks and investors in constructive dialogue about the required operational and business changes. If these are not forthcoming, then the cure will indeed turn out to have been worse than the disease.

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Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 25 (2012)
Issue (Month): C ()
Pages: 159-166

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Handle: RePEc:eee:finana:v:25:y:2012:i:c:p:159-166
DOI: 10.1016/j.irfa.2012.08.004
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  1. Paraskevi Dimou & Colin Lawrence & Alistair Milne, 2005. "Skewness of Returns, Capital Adequacy, and Mortgage Lending," Journal of Financial Services Research, Springer;Western Finance Association, vol. 28(1), pages 135-161, October.
  2. Miles, David & Yang, Jing & Marcheggiano, Gilberto, 2011. "Optimal Bank Capital," Discussion Papers 31, Monetary Policy Committee Unit, Bank of England.
  3. Ben S. Bernanke, 1993. "Credit in the macroeconomy," Quarterly Review, Federal Reserve Bank of New York, issue Spr, pages 50-70.
  4. Richard Brealey, 2006. "Basel II: The Route Ahead or Cul-de-Sac?," Journal of Applied Corporate Finance, Morgan Stanley, vol. 18(4), pages 34-43.
  5. William A Allen, 2012. "Government debt management and monetary policy in Britain since 1919," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 15-50 Bank for International Settlements.
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