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Adding it all up: the macroeconomic impact of Basel II and outstanding reform issues

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  • Ingo Fender
  • Ulf Lewrick

Abstract

As the Basel III package nears completion, the emphasis is shifting to monitoring its implementation and assessing the impact of the reforms. This paper presents a simple conceptual framework to assess the macroeconomic impact of the core Basel III reforms, including the leverage ratio surcharge that is being considered for global systemically important banks (G-SIBs). We use historical data for a large sample of major banks to generate a conservative approximation of the additional amount of capital that banks would need to raise to meet the new regulatory requirements, taking the potential impact of current efforts to enhance G-SIBs' total loss-absorbing capacity into account. To provide a high-level proxy for the effect of changes in capital allocation and bank business models on the estimated net benefits of regulatory reform, we simulate the effect of banks converging towards the "critical" average risk weights (or "density ratios") implied by the combined risk-weighted and leverage ratio-based capital requirements. While keeping in mind that quantifying the regulatory impact remains subject to caveats, the results suggest that Basel III can be expected to generate sizeable macroeconomic net benefits even after the implied changes to bank business models have been taken into account.

Suggested Citation

  • Ingo Fender & Ulf Lewrick, 2016. "Adding it all up: the macroeconomic impact of Basel II and outstanding reform issues," BIS Working Papers 591, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:591
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    References listed on IDEAS

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    Cited by:

    1. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95, September.
    2. Josef Schroth, 2019. "Macroprudential Policy with Capital Buffers," Staff Working Papers 19-8, Bank of Canada.
    3. Frederic Boissay & Fabrice Collard, 2016. "Macroeconomics of bank capital and liquidity regulations," BIS Working Papers 596, Bank for International Settlements.
    4. Codruta Boar & Leonardo Gambacorta & Giovanni Lombardo & Luiz Awazu Pereira da Silva, 2017. "What are the effects of macroprudential policies on macroeconomic performance?," BIS Quarterly Review, Bank for International Settlements, September.
    5. Adrian, Tobias & Kiff, John & Shin, Hyun Song, 2018. "Liquidity, Leverage, and Regulation Ten Years after the Global Financial Crisis," CEPR Discussion Papers 13350, C.E.P.R. Discussion Papers.
    6. Tirupam Goel, 2016. "Banking industry dynamics and size-dependent capital regulation," BIS Working Papers 599, Bank for International Settlements.
    7. Jose Felix Izquierdo & Santiago Muñoz & Ana Rubio & Camilo Ulloa, 2017. "Impact of capital regulation on SMEs credit," Working Papers 17/01, BBVA Bank, Economic Research Department.
    8. Behn, Markus & Daminato, Claudio & Salleo, Carmelo, 2019. "A dynamic model of bank behaviour under multiple regulatory constraints," Working Paper Series 2233, European Central Bank.
    9. Jose Felix Izquierdo & Santiago Muñoz & Ana Rubio & Camilo Ulloa, 2017. "Impact of capital regulation on SMEs credit," Working Papers 17/01, BBVA Bank, Economic Research Department.

    More about this item

    Keywords

    Basel III; density ratio; global systemically important banks; leverage ratio; macroeconomic impact; risk-shifting;

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