Basel III Could Slightly Impact Economic Growth

The Basel Committee on Banking Supervision overhaul of bank capital rules may cut global economic growth by 0.22 percent, which is seen as a reasonable amount.  This will occur over an eight-year transitional period during which the rules are put into place, according to the Basel committee and Financial Stability Board (FSB).  According to the FSB and the Basel committee, “The transition to stronger capital standards is likely to have a modest impact on aggregate output.”

Regulators are reassuring lenders and companies that the Basel III overhaul may force banks to cut back on lending, thus hurting the economic recovery.  According to the Institute of International Finance, an earlier version of the plan would have cut economic output by 3.1 percent in the eurozone, the United States and Japan from 2011 through 2015.  Etay Katz, a partner at the London-based law firm of Allen & Overy LLP, thinks the report “leaves quite a lot more to be desired.  I think bankers, when they see this, will be skeptical of the rigor with which this analysis has been conducted.”  Katz thinks the impact of Basel liquidity rules was not taken into account.

According to the new numbers, yearly growth could be as much as 0.03 percentage points below the baseline scenario – and that assumes that banks won’t have to comply with the revised regulations – over eight years.  Regulators are overhauling bank capital and liquidity prerequisites because the Basel II rules did not protect lenders during the financial crisis.  The Basel III rules have been approved by the G20 nations.