Study: New Capital Rules Less Harmful

On Wednesday, two studies were published that investigate the consequences of the new international banking regulations. The studies found that regulations on how much capital banks are required to hold will hinder economic growth in the short term, as borrowing will be more expensive.

However, the studies, conducted by the bankers and regulators who are penning the new regulations, revealed that the economic effects of the new capital requirement rules will have less of an economic impact than many were led to believe. The studies also said that tighter regulations will eventually lead to sustainable, higher growth, and future protection against banking crises.

The new capital requirements were proposed by the Basel Committee back in July, and would require banks to hold $3 in capital for every $100 they lend. The regulation would also tighten requirements for the kinds of assets that can be considered “capital”. It would require banks to increase their holdings of liquid assets as well, which could be easily traded to raise cash if needed.

The studies were published by the Financial Stability Board and the Basel Committee on Banking Supervision. Members of these two organizations include central bankers and regulators from the US, China, Europe, and other major countries. Their studies were not in line with claims from the banking industry that the new regulations would significantly stunt growth.

Stephen Cecchetti, a top official for the Bank of Intl. Settlements in Basel, Switzerland, said that the estimated changes in output of the proposed regulations “are significantly smaller than some comparable estimates published by banking industry groups.”

The Basel committee study found that the impact the new rules would have on GDP growth would only be about one-eighth as large as the estimation derived from the Institute for International Finance, a banking industry group headed by Deutsche Bank CEO Josef Ackermann.

Mario Draghi, chairman of the Financial Stability Board, said that “the analysis shows that the macroeconomic costs of implementing stronger standards are manageable… The longer-term benefits to financial stability and more stable economic growth are substantial.”

The proposals will be considered when leaders of the Group of 20 nations meet in Seoul in November. Even if the regulations are passed, they will not be implemented until 2018, which has lead to criticism that the central bankers are being too soft on banks. The IMF, which also took part in the studies, said that banks could offset the new capital requirement costs by cutting costs and banker pay. Bank stocks climbed higher on the news, as investors viewed the announcement as a relief that the regulations being considered would not have such a significant negative impact on growth.