New bank capital rules to have 'modest' GDP impact: BIS

10th October 2011, Comments 0 comments

The implementation of tough new capital rules for the world's biggest banks would have a "modest impact" on output, regulators said Monday, noting that their long-term benefits far outweigh their costs.

"The transition to stronger capital standards on global systemically important banks is likely to have at most a modest impact on aggregate output, while the benefits from reducing the risk of damaging financial crises will be substantial," said the Basel Committee on Banking Supervision.

In a bid to prevent a repeat of the 2008-2009 financial crisis when governments were forced to bail out banks, regulators agreed in 2010 on Basel III rules requiring all banks to strengthen their capital reserves by raising total core reserves to 7.0 percent from 2.0 percent at the moment.

In addition, regulators decided in 2011 to impose additional rules on the world's biggest banks, by asking them to hold 1.0 to 2.5 percent more in core reserves, on top of the 7.0 percent required for all banks.

Some bankers have raised fears that the new capital rules will hit profits since they will force the lenders to hold more money in reserve rather than put it to work.

However, regulators said in their report published Monday that the overall impact of the rules, including Basel III regulations as well as additional requirements for the biggest banks, would cut gross domestic product at the point of peak impact by just 0.34 percent.

Meanwhile increasing the reserves of the world's biggest banks by one percentage point would lower GDP by just 0.01 percent during an 8-year implementation period, they added.

The main impact from these rules arises from higher lending spreads expected to be applied by banks during this period to discourage loans.

Lending spreads are the difference between the rate applied by banks when lending funds and the national base rate.

Regulators believe that spreads may rise by 5 to 6 basis points when banks are implementing the new rules.

Nevertheless, they note that the overall benefits to the overall economy are far larger.

"The benefits of the global systemically important banks framework relate primarily to the reduction in the exposure of the financial system to systemic crises that can have long-lasting effects on the economy," they said.

The new rules on all banks as well as the additional ones for banks, are expected to reap gains of 2.5 percent in output, "many times the costs of the reforms in terms of temporarily slower annual growth."

Regulations targetted at the biggest banks are meanwhile to boost GDP by 0.5 percent.

The measures for systemically relevant banks are to be presented to November's G20 summit in Cannes, France.

© 2011 AFP

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