A Cost-Benefit Analysis of Basel III: Some Evidence from the UK

33 Pages Posted: 21 Aug 2011 Last revised: 27 Sep 2011

See all articles by Meilan Yan

Meilan Yan

Loughborough University

Max J.B. Hall

Loughborough University - Department of Economics

Paul Turner

Loughborough University - Department of Economics

Date Written: August 20, 2011

Abstract

This paper provides a long-term cost-benefit analysis for the United Kingdom of the Basel III capital and liquidity requirements proposed by the Basel Committee on Banking Supervision (BCBS, 2010a). We provide evidence that the Basel III reforms will have a significant net positive long-term effect on the United Kingdom economy. The estimated optimal tangible common equity capital ratio is 10% of risk-weighted assets, which is larger than the Basel III target of 7%. We also estimate the maximum net benefit when banks meet the Basel III long-term liquidity requirements. Our estimated permanent net benefit is larger than the average estimates of the BCBS. This significant marginal benefit suggests that UK banks need to increase their reliance on common equity in their capital base beyond the level required by Basel III as well as boosting customer deposits as a funding source.

Keywords: Basel III, Cost-Benefit anaylsis, Tangible Common Equity Capital, Liquidity

JEL Classification: C32, C53, G01, G21, G28

Suggested Citation

Yan, Meilan and Hall, Max J.B. and Turner, Paul, A Cost-Benefit Analysis of Basel III: Some Evidence from the UK (August 20, 2011). Available at SSRN: https://ssrn.com/abstract=1913433 or http://dx.doi.org/10.2139/ssrn.1913433

Meilan Yan (Contact Author)

Loughborough University ( email )

Ashby Road
Nottingham NG1 4BU
Great Britain

Max J.B. Hall

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain

Paul Turner

Loughborough University - Department of Economics ( email )

York House
Loughborough LE11 3TU
Great Britain

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