Basel III Could Slightly Impact Economic Growth

Basel III Could Slightly Impact Economic GrowthThe 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.

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One Response to “Basel III Could Slightly Impact Economic Growth”

  1. Rajnish Ramchurun says:

    “Basel III” is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:

    1. improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source
    2. improve risk management and governance
    3. strengthen banks’ transparency and disclosures.

    The reforms target both micro and macro prudential regulation.

    Micro Prudential Regulation

    At bank-level, or microprudential, regulation, they will help raise the resilience of individual banking institutions to periods of stress. Practically, these reforms mean:

    A significant increase in risk coverage, with a focus on areas that were most problematic during the crisis, that is trading book exposures, counterparty credit risk, and securitisation activities;

    A fundamental tightening of the definition of capital, with a strong focus on common equity. At the same time, this represents a move away from complex hybrid instruments, which did not prove to be loss absorbing in periods of stress. We also introduced requirements that all capital instruments must absorb losses at the point of non-viability, which was not the case in the crisis;

    The introduction of a leverage ratio to serve as a backstop to the risk-based framework;
    The introduction of global liquidity standards to address short-term and long-term liquidity mismatches; and

    Enhancements to Pillar 2’s supervisory review process and Pillar 3’s market discipline, particularly for trading and securitisation activities.

    Macro Prudential Regulation

    In addition, a unique feature of Basel III is the introduction of macroprudential elements into the capital framework. At macroprudential, they wlll help to deal with system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time. These include:

    Standards that promote the build-up of capital buffers in good times that can be drawn down in periods of stress, as well as clear capital conservation requirements to prevent the inappropriate distribution of capital;

    The leverage ratio also has system-wide benefits by preventing the excessive build-up of debt across the banking system during boom times.

    To minimise the transition costs, the Basel III requirements will be phased in gradually as of 1 January 2013.

    These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks.

    Basel III is part of the Committee’s continuous effort to enhance the banking regulatory framework. It builds on the International Convergence of Capital Measurement and Capital Standards document (Basel II).


    Basel III: stronger banks and a more resilient financial system
    Speech by Stefan Walter, Secretary General, Basel Committee on Banking Supervision, at a Conference on Basel III by the Financial Stability Institute, Basel, 6 April 2011.

    International regulatory framework for banks (Basel III)
    Available at:

    Prepared by: Rajnish Ramchurun
    B.Sc(Hons), MBA, ACCA, MIPA, Associate ACFE, Basic Member OCEG, Member Basel III Compliance Professionals Association, IFAC Online Registered User, AICPA Online registered User, IFRS Online Registered User.

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