WASHINGTON — Adoption of higher capital and liquidity requirements will not handicap the global economy in the long term, but it will help stave off economic crises, international regulators said Wednesday.
The Basel Committee on Banking Supervision and the Financial Stability Board released two widely anticipated reports that they said refute claims that higher capital and liquidity standards will harm the economy. "The analysis shows that the macroeconomic costs of implementing stronger standards are manageable, especially with the appropriate phase-in arrangements, while the longer-term benefits to financial stability and more stable economic growth are substantial," Mario Draghi, chairman of the Financial Stability Board and governor of the Bank of Italy, said in a press release.
Still, one report acknowledged that increased capital requirements could hurt banks and consumers in the short term. The report said that it will end up being more expensive for banks to fund assets with capital than with deposits or wholesale debt. That means banks facing stronger capital requirements will increase capital levels by retaining earnings and issuing equity and reducing nonloan assets, the report said.
That could result in higher interest rates for borrowers and a reduction in new lending.
"If the transition period is short, banks may choose to curtail credit supply in order to lift capital ratios and adjust asset composition and holdings quickly," the report said.
Still, regulators argue that in future years banks will become less risky, helping to counter any negative impact.
"The economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Nout Wellnick, chairman of the Basel Committee and president of the Netherlands 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."
The FSB and the Basel Committee also concluded that a longer transition period would ultimately reduce the impact on gross domestic product as banks begin implementing capital and liquidity reforms currently being negotiated by the 27-member group.
"A longer transition period could substantially mitigate the impact, allowing banks additional time to adapt by retaining earnings, issuing equity, shifting liability composition, and the like," the report said. "Whether the transition is long or short, decisive action to strengthen banks' capital and liquidity positions could boost confidence in the long-term stability of the financial system as soon as implementation starts."
Those results help contradict claims by banking industry groups like the Institute of International Finance, which have argued the net economic impact of Basel III reforms could be much deeper.
"The longer the implementation period, the smaller any potential transitory effect on credit availability and GDP are likely to be," the report said. "Maximum GDP loss is estimated to occur around the end of the transition period, which could be at a more mature and resilient stage of the current recovery."
The report based its analysis on a 1-percentage-point increase in the target capital ratio and a 25% increase in the holding of liquid assets over 18 quarters, or a four-and-a-half-year period.
The impact on GDP of lifting the target capital ratio by 1 percentage point is "quite modest — less than one quarter of 1% at its worst," the report said. An increase in liquid assets would have less than half of the effect of a 1% rise in capital ratios over the same period, it said.
