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Measuring the impact of Basel III

D. J. Elliot and E. Balta

Financial Stability Review, 2017, issue 21, 33-43

Abstract: Basel III’s enhanced capital and liquidity standards promise to bring greater stability to the financial system, but at a price. Higher safety margins raise costs for financial institutions, which must be borne by customers, employees, or funders. Estimating these costs is therefore critically important to finding the right balance of safety and efficiency. This paper highlights key findings from a 150-page impact study by the management consulting firm of Oliver Wyman,1 based on a review of approximately 400 analyses by academics, official institutions, and the private sector. Putting the studies on a common basis, the authors find expected gross increases in funding costs for lending that are substantial, often exceeding industry net returns on assets. They do not evaluate the size of financial stability benefits and therefore do not reach a conclusion as to whether the costs of Basel III exceed the benefits. However, this study provides a comprehensive assessment of the cost of enhanced standards – one side of the coin – to help policymakers better balance safety and efficiency.

Date: 2017
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