The war of words between financial regulators, including central bankers, and bankers over the economic impact of the proposed Basel III reforms is not showing much sign of abating.
The proposed new rules, which are a key part of the G20’s push for a more stable financial system, would force banks to hold more capital and liquid assets. The rules are being finalized by the Basel-based Bank for International Settlements, the oversight body for the global banking sector whose Basel Committee is manned by representatives of the developed world's central banks.
The Basel committee wants to tighten the definition of what constitutes core tier one capital, the basic measure of a bank’s financial strength. It also wants to force banks to hold sufficient liquid assets to survive a short-term market crisis and reduce their dependence on short-term wholesale funding.
The bankers are fighting a rearguard action in the hope of having the Basel III proposals rewritten, watered down or at least delayed. Their global lobby group, the Institute of International Finance, argues banks will have to raise $700bn of common equity and issue $5,400bn of new long-term wholesale debt in 2010-15 if the requirements are to be met.
The IIF’s nuclear weapon is a 157-page report, unveiled at a recent conference in Vienna. This warns that, if the Basel III is implemented unchanged , it would shave three percentage points off economic growth in the US, the eurozone and Japan over the next five years and cause 9.7m fewer jobs to be created.
The IIF’s report, which took a 54-person working group six months to complete, said the eurozone would be worst affected, with growth weaker by 0.9 percentage points per year, resulting in a cumulative GDP reduction of €765bn or 4.3%, by 2015. The US would see a cumulative reduction of 2.6% or $951bn, and Japan would see a fall of 1.9% or $130bn.
Without quite going as far as accusing the banks of scaremongering, financial regulators have been quietly seeking to rubbish such figures. They have accused the IIF of using questionable hypotheses to over-dramatize the repercussions of Basel III.
José María Roldán, Madrid-based director-general for banking regulation at Banco de España and chair of the Basel Committee's standards implementation group, told Risk.net:
"Any analysis of this kind has to be based on a lot of assumptions and hypotheses. The assumptions the IIF has used put its estimates on the ceiling of the possible effects. The best way to deal with this uncertainty about transition costs is to rely on a variety of models and hypotheses.”
Others stressed that any study of Basel III’s impact must also take into account the positive benefits to the real economy of having a more stable financial system. Maarten Gelderman, head of macro-prudential analysis at De Nederlandsche Bank, said:
"The bottom line is the [IIF] study looks only at the cost rather than the benefit. At the end of the day, we are doing this mainly to safeguard the economy against the kind of crisis we have experienced over the past couple of years. Any study evaluating the reform proposals should look at both the costs and the benefits.”
Members of the Basel committee acknowledge they must be conscious that their proposals could have a negative effect on growth, and have pledged to incorporate the IIF's findings, along with those of their own impact assessments, when finalizing the Basel III package, which is due to be voted on later this year.Nout Wellink, chairman of the Basel Committee and a member of the European Central Bank has already made some conciliatory noises. He said that his organization may consider delaying implementation of Basel III.
"We will ensure the banking sector can move to the new standards through earnings retention and reasonable capital raising. Where there are trade-offs, these should go in the direction of giving banks the time to reach the new standards instead of watering down the standards themselves.”
Further reading on economic impact of Basel III and Basel II
- Revising Basel II—But at What Cost? by Vishal Vedi
- Tripping over Prudence—Ideas for a Sensible Fix for Basel II, by Samuel Sender and Noel Amenc
- Basel II Mark II, better for the bruising? by Anthony Harrington [blog post]
- Basel II—Its Development and Aims [checklist]
Tags: Bank for International Settlements , banking , Basel III , capital adequacy , central banks , regulation