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

  • Paolo Angelini

    ()

    (Bank of Italy)

  • Laurent Clerc

    ()

    (Banque de France)

  • Vasco C�rdia

    ()

    (Federal Reserve Bank of New York)

  • Leonardo Gambacorta

    ()

    (Bank for International Settlements)

  • Andrea Gerali

    ()

    (Bank of Italy)

  • Alberto Locarno

    ()

    (Bank of Italy)

  • Roberto Motto

    ()

    (European Central Bank)

  • Werner Roeger

    ()

    (European Commission)

  • Skander Van den Heuvel

    ()

    (Board of Governors of the Federal Reserve System)

  • Jan Vlcek

    ()

    (International Monetary Fund)

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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File URL: http://www.bancaditalia.it/pubblicazioni/qef/2011-0087/QEF_87.pdf
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Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Questioni di Economia e Finanza (Occasional Papers) with number 87.

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Date of creation: Feb 2011
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Handle: RePEc:bdi:opques:qef_87_11
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Web page: http://www.bancaditalia.it
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  1. Beau, D. & Clerc, L. & Mojon, B., 2011. "Macro-prudential policy and the conduct of monetary policy," Occasional papers 8, Banque de France.
  2. Vasco Cúrdia & Michael Woodford, 2009. "Credit frictions and optimal monetary policy," BIS Working Papers 278, Bank for International Settlements.
  3. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  4. Jeanne, Olivier & Korinek, Anton, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," CEPR Discussion Papers 8015, C.E.P.R. Discussion Papers.
  5. Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," Working Papers 11-32, Bank of Canada.
  6. 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.
  7. Scott Roger & Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 11/103, International Monetary Fund.
  8. Paolo Angelini & Stefano Neri & Fabio Panetta, 2011. "Monetary and macroprudential policies," Temi di discussione (Economic working papers) 801, 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 277, Banque de France.
  11. Mathias Drehmann & Claudio Borio & Leonardo Gambacorta & Gabriel Jiminez & Carlos Trucharte, 2010. "Countercyclical capital buffers: exploring options," BIS Working Papers 317, Bank for International Settlements.
  12. Skander Van den Heuvel, 2005. "The Welfare Cost of Bank Capital Requirements," 2005 Meeting Papers 880, Society for Economic Dynamics.
  13. Jeanne, O. & Korinek, A., 2010. "Managing Credit Booms and Busts : A Pigouvian Taxation Approach," Discussion Paper 2010-108S, Tilburg University, Center for Economic Research.
  14. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
  15. repec:dgr:kubcen:2010108s is not listed on IDEAS
  16. 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.
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