Effects of Basel III Higher Capital and Liquidity Requirements on Banking Sectors across the Main South East Asian Nations
24 Pages Posted: 30 Oct 2018
Date Written: April 1, 2018
This paper analyzes the cost impact of the Basel III higher capital and liquidity requirements on bank capital, lending spreads, and steady state output across the main Southeast Asian nations (ASEAN-5). We also investigate potential long-run economic benefit expressed as a gain in steady state output (GDP). By emphasizing the use of dynamic stochastic general equilibrium and vector error correction models, we find that ASEAN-5 banking sectors are comfortably capitalized and need no recapitalization by January 1st 2019 deadline when Basel III is fully enforced. The new Basel III rules are assumed to force ASEAN-5 banks to increase lending spreads to pass down a portion of increasing funding costs to bank customers. The impact of 1 percentage point rise in common equity Tier 1 ratio on lending spreads is analyzed; to meet the regulatory capital minima of 7% as of 2015, ASEAN-5 banks will have to increase lending spreads by 30 basis points on average; to meet 10.5% fully effective by January 2019, ASEAN-5 banks will have to increase average lending spreads by 68 basis points. In terms of economic benefits, the estimates of this study indicate that the projected economic benefits across ASEAN-5 outweigh the economic costs in the long-run.
Keywords: Financial stability; Basel III; ASEAN-5; procyclicality; Southeast Asian nations
JEL Classification: E44, E61, G21
Suggested Citation: Suggested Citation