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Basel III: Long-Term Impact on Economic Performance and Fluctuations

38 Pages Posted: 23 May 2011  

Paolo Angelini

Bank of Italy

Laurent Clerc

Banque de France

Vasco Cúrdia

Federal Reserve Bank of San Francisco

Leonardo Gambacorta

Bank for International Settlements (BIS); Centre for Economic Policy Research (CEPR)

Andrea Gerali

Bank of Italy

Alberto Locarno

Bank of Italy

Roberto Motto

European Central Bank (ECB)

Werner Roeger

European Commission, DGECFIN

Skander Van den Heuvel

Federal Reserve Board

Jan Vlček

International Monetary Fund (IMF)

Multiple version iconThere are 5 versions of this paper

Date Written: February 22, 2011

Abstract

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

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

Paolo Angelini (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Laurent Clerc

Banque de France ( email )

Paris
France

Vasco Cúrdia

Federal Reserve Bank of San Francisco ( email )

101 Market Street
MS 1130
San Francisco, CA 94105
United States
(415) 977-3624 (Phone)

HOME PAGE: http://www.frbsf.org/economics/economists/staff.php?vcurdia

Leonardo Gambacorta

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Andrea Gerali

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Alberto Locarno

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Roberto Motto

European Central Bank (ECB) ( email )

Kaiserstrasse 29
Postfach 16 03 19
D-60311 Frankfurt am Main
Germany

Werner Roeger

European Commission, DGECFIN ( email )

Economic and Financial Affairs
BU1-3/159, 200 Rue de la Loi
B-1049 Brussels
Belgium

Skander Van den Heuvel

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Jan Vlček

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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