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BASEL III: long-term impact on economic performance and fluctuations

  • Paolo Angelini
  • Laurent Clerc
  • Vasco Cúrdia
  • Leonardo Gambacorta
  • Andrea Gerali
  • Alberto Locarno
  • Roberto Motto
  • Werner Roeger
  • Skander Van den Heuvel
  • Jan Vlcek

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, analyzed in Basel Committee on Banking Supervision (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 sizable dampening effect on output volatility.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 485.

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Date of creation: 2011
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Handle: RePEc:fip:fednsr:485
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  1. Vasco Cúrdia & Michael Woodford, 2009. "Credit frictions and optimal monetary policy," BIS Working Papers 278, Bank for International Settlements.
  2. Christiano, Lawrence & Rostagno, Massimo & Motto, Roberto, 2010. "Financial factors in economic fluctuations," Working Paper Series 1192, European Central Bank.
  3. Scott Roger & Jan Vlcek, 2011. "Macroeconomic Costs of Higher Bank Capital and Liquidity Requirements," IMF Working Papers 11/103, International Monetary Fund.
  4. 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.
  5. Olivier Jeanne & Anton Korinek, 2010. "Managing Credit Booms and Busts: A Pigouvian Taxation Approach," Working Paper Series WP10-12, Peterson Institute for International Economics.
  6. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and banking in a DSGE model of the euro area," Temi di discussione (Economic working papers) 740, Bank of Italy, Economic Research and International Relations Area.
  7. Ian Christensen & Césaire Meh & Kevin Moran, 2011. "Bank Leverage Regulation and Macroeconomic Dynamics," CIRANO Working Papers 2011s-76, CIRANO.
  8. Van den Heuvel, Skander J., 2008. "The welfare cost of bank capital requirements," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 298-320, March.
  9. 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.
  10. Beau, D. & Clerc, L. & Mojon, B., 2011. "Macro-prudential policy and the conduct of monetary policy," Occasional papers 8, 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. Dellas, H. & Diba, B. & Loisel, O., 2010. "Financial Shocks and Optimal Policy," Working papers 277, Banque de France.
  13. Michael R King, 2010. "Mapping capital and liquidity requirements to bank lending spreads," BIS Working Papers 324, Bank for International Settlements.
  14. Enrique G. Mendoza & Javier Bianchi, 2011. "Overborrowing, Financial Crises and ‘Macro-Prudential’ Policy?," IMF Working Papers 11/24, International Monetary Fund.
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