38 Pages Posted: 23 May 2011
Date Written: February 22, 2011
We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. (1) What is the impact of the reform on long-term economic performance? (2) What is the impact of the reform on economic fluctuations? (3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. (1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analysed in Basel Committee on Banking Supervision (BCBS, 2010b). (2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest. (3) The adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility. These conclusions are fully consistent with those of reports by the Long-term Economic Impact group (BCBS, 2010b) and Macro Assessment Group (MAG, 2010b).
Keywords: Basel III, countercyclical capital buffers, financial (in)stability, procyclicality, macroprudential
JEL Classification: E44, E61, G21
Suggested Citation: Suggested Citation
Angelini, Paolo and Clerc, Laurent and Cúrdia, Vasco and Gambacorta, Leonardo and Gerali, Andrea and Locarno, Alberto and Motto, Roberto and Roeger, Werner and Van den Heuvel, Skander and Vlček, Jan, Basel III: Long-Term Impact on Economic Performance and Fluctuations (February 22, 2011). Bank of Italy Occasional Paper No. 87. Available at SSRN: https://ssrn.com/abstract=1849866 or http://dx.doi.org/10.2139/ssrn.1849866