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Basel study undermines bank lobby on capital rules


Patrick Jenkins is the FT's banking editor

Global regulators insist the economic cost of implementing tough new rules on bank capital requirements will have only a tiny effect on global growth, with their latest estimate putting the impact at barely a tenth of the industry's own projection.

In an assessment of the impact of the Basel III rulebook published late on Monday, the Financial Stability Board and the Basel Committee on Banking Supervision, the two international oversight bodies, concluded that the reforms would only slow gross domestic product by 0.34 per cent at its peak over the eight-year period during which the rules are being implemented.

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The impact would settle back to a permanent negative of about 0.3 per cent, the study found.

A recent study by the Institute of International Finance, which represents most global banks, estimated that the new rules could bring global output down by 3.2 per cent by 2015 and lead to 7.5 million fewer jobs being created.

Banks would push up lending rates by 3.5 percentage points as they struggle to safeguard profits while building an additional $1.3-trillion in capital by 2015, the IIF study predicted.

Part of the discrepancy in the two sides' views stems from banks' belief that they will be forced either by local regulators or by peer and market pressure to increase capital levels far earlier than the formal 2019 deadline.

The economic impact of the Basel III rules and of other regulatory reforms is a particularly sensitive issue at the moment, given the tumult in euro zone markets, and rising expectations that the western world could be in for a prolonged period of economic stagnation.

Last month's final report by the U.K. government-appointed Vickers Commission, which recommended that big banks should ringfence their core high street operations, predicted a £4-billion-£7-billion cost of implementation, equivalent to an extra 0.1 percentage point on the average cost of borrowing, the Commission said.

The Basel III changes would add an extra 0.31 percentage points to borrowing margins, the FSB and the Basel Committee concluded.

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However, Monday's report argued that overall there would be a strong economic benefit from the Basel III changes, which involve raising the minimum capital requirements for all banks to 7 per cent equity as a ratio of risk-weighted assets. Large systemically important banks, known as G-Sifis, will be required to hold additional capital up to 2.5 percentage points above the minimum.

There would be a "permanent annual benefit of up to 2.5 per cent of GDP -- many times the costs of the reforms in terms of temporarily slower annual growth", the report concluded, thanks to the reduced likelihood of costly bank failures.

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