Basel: Cost to growth of new banking rules will be modest

NEW bank rules will cut global output by a small fraction, a “modest” price to pay for greater stability, the Basel Committee on Banking Supervision said yesterday, dismissing lenders’ warnings that they may curb growth severely.

The new “Basel III” rules for banks’ capital and liquidity will tighten lending and reduce investment during a transition period, but to a much lower degree than forecast by banks, Basel and the Financial Stability Board (FSB) said yesterday.

“Macroeconomic costs of implementing stronger standards are manageable...while the longer-term benefits to financial stability are substantial,” FSB chairman Mario Draghi said.

Assuming the rules are phased in over four years and banks’ capital levels rise by two percentage points, output would on average decline by 0.38 per cent compared to a baseline scenario, according to an analysis by the FSB, a body tasked by the G20 to coordinate a string of market reforms including Basel III. This is only an eighth of the 3.1 per cent output loss over five years due to Basel III and other measures which bank lobby group The Institute of International Finance (IIF) has predicted for the United States and the Eurozone.