Do Bank Capital and Liquidity Affect Real Economic Activity in the Long Run? A VECM Analysis for the US

17 Pages Posted: 28 Jan 2012

See all articles by Leonardo Gambacorta

Leonardo Gambacorta

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

Date Written: November 2011

Abstract

This paper analyses the long-term economic costs of the new regulatory standards (the so‐called Basel III reform) for the US. Using a Vector Error Correction Model that estimates long‐run relationships among a small set of macro‐variables over the period 1994-2008, it shows that tighter capital and liquidity requirements have negative (but rather limited) effects on the level of long-run steady-state output and more sizeable effects on banks’ return on equity. The economic costs are considerably below the estimated positive benefit that the reform should have by reducing the probability of banking crises and the associated banking losses (BCBS, 2010b).

Keywords: G21

JEL Classification: E44, E61

Suggested Citation

Gambacorta, Leonardo, Do Bank Capital and Liquidity Affect Real Economic Activity in the Long Run? A VECM Analysis for the US (November 2011). Economic Notes, Vol. 40, Issue 3, pp. 75-91, 2011, Available at SSRN: https://ssrn.com/abstract=1994243 or http://dx.doi.org/10.1111/j.1468-0300.2011.00234.x

Leonardo Gambacorta (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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