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The macroeconomic impact of Basel III on the Italian economy

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  • Alberto Locarno

    () (Banca d'Italia)

Abstract

This paper provides an assessment of the costs of complying with Basel III for the Italian economy. The main findings are the following. For each percentage point increase in the capital ratio implemented over an eight-year horizon, the level of GDP would decline by 0.00-0.33% (0.03-0.39% if credit rationing is also accounted for), corresponding to a reduction of annual output growth in the transition period of 0.00-0.04 percentage points (0.00-0.05 percentage points if credit rationing is considered as well). Compliance with the new liquidity standards causes an additional slowdown of annual GDP growth of at most 0.02 percentage points. If banks felt forced to speed up the transition to the new capital rules by the beginning of 2013, the fall in output would be larger and would take place beforehand. Long-run costs of achieving the new capital standards are even lower, slightly less than 0.2%; those needed to comply with the target liquidity ratio are of a similar size. The above estimates suggest that the economic costs of Basel III are not huge and become negligible if compared with the potential benefits that can be reaped from reducing the frequency of systemic crises and the amplitude of boom-bust cycles.

Suggested Citation

  • Alberto Locarno, 2011. "The macroeconomic impact of Basel III on the Italian economy," Questioni di Economia e Finanza (Occasional Papers) 88, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:opques:qef_88_11
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    Cited by:

    1. Nobili, Andrea & Zollino, Francesco, 2017. "A structural model for the housing and credit market in Italy," Journal of Housing Economics, Elsevier, vol. 36(C), pages 73-87.
    2. Eufrocinio M. Bernabe, Jr. & Jami’ah Jaffar, 2013. "Gauging the Macroeconomic Impact of Basel III on Malaysia," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp87, April.
    3. Sebastian Krug & Matthias Lengnick & Hans-Werner Wohltmann, 2014. "The impact of Basel III on financial (in)stability: an agent-based credit network approach," Quantitative Finance, Taylor & Francis Journals, vol. 15(12), pages 1917-1932, December.
    4. Claudia Miani & Giulio Nicoletti & Alessandro Notarpietro & Massimiliano Pisani, 2012. "Banks� balance sheets and the macroeconomy in the Bank of Italy Quarterly Model," Questioni di Economia e Finanza (Occasional Papers) 135, Bank of Italy, Economic Research and International Relations Area.

    More about this item

    Keywords

    Basel III; Modigliani-Miller theorem; flow/stock costs of equity finance; capital/liquidity requirements;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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