New research offers a robust defence of stricter capital requirements in the face of banking industry lobbying.
The reports, from the Financial Stability Board, the Basel Committee on Banking Supervision and the International Monetary Fund, assess the long-term economic impact of tougher capital and liquidity requirements for banks. If phased in over a four-year period, each percentage point increase in banks’ core capital ratio trims 0.04% from the annual growth rate of GDP over the phase-in period, leaving GDP 0.2% lower at the end of four-and-a-half-years than it otherwise would have been. A 25% hike in liquid asset holdings affects growth even less. “The benefits substantially exceed the potential output costs,” the groups conclude.
A similar exercise this summer by the Institute of International Finance, a banking industry association, came to a much gloomier conclusion. Under “reasonable assumptions,” it concluded that GDP in the US, Europe and Japan would be 3% lower at the end of a five-year transition period, with nearly 10m fewer jobs created as a result. A subsequent softening of the original proposals for global capital and liquidity reforms may temper the lobby’s distress, but it’s safe to say that regulators will continue to laud the benefit of stricter rules while banks will keep fretting about the costs.