New bank capital rules have 'modest' GDP impact: regulators

18th August 2010, Comments 0 comments

Tougher bank capital and liquidity rules will have a "modest impact" on economic growth in the short-term but could reap later benefits that far outweigh any initial decline, regulators said Wednesday.

A joint assessment by the Financial Stability Board and the Basel Committee on Banking Supervision found that "the transition to stronger capital and liquidity standards is likely to have a modest impact on aggregate output.

"The economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Nout Wellink, chairman of the Basel Committee and the president of the Netherlands' central bank.

"These benefits result not only from a stronger banking system in the long run but also from greater confidence in the stability of the financial system as soon as implementation starts," he added in a statement.

Commercial banks have been resisting the new standards planned by top central bankers and regulators, warning that they would hurt the global economy as it emerges from a global recession.

They argue that financial institutions would be forced to cut back on lending as they hoard more capital to ensure that they comply with the new rules.

The assessment found that for every one percentage point increase in banks' capital ratio, Gross Domestic Product is expected to fall by 0.2 percent.

Phased in over a four-and-a-half year period, this would translate to an average 0.04 percent drop in annual output.

Each 25 percent increase in banks liquid asset holdings is also expected to cut GDP by 0.08 percent.

The impact on GDP is likely as banks would pass on the higher costs they incurred to borrowers, a move that could hurt investment.

However, regulators stressed that tougher rules will also bring greater stability to the economy, particularly since they help in avoiding financial crises that could lead to losses that exceed pre-crisis economic output.

In July, regulators agreed broadly on the new standards but granted banks more time than initially planned to implement the new rules.

© 2010 AFP

0 Comments To This Article