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Adding it all up: the macroeconomic impact of Basel II and outstanding reform issues

Ingo Fender and Ulf Lewrick

No 591, BIS Working Papers from Bank for International Settlements

Abstract: As the Basel III package nears completion, the emphasis is shifting to monitoring its implementation and assessing the impact of the reforms. This paper presents a simple conceptual framework to assess the macroeconomic impact of the core Basel III reforms, including the leverage ratio surcharge that is being considered for global systemically important banks (G-SIBs). We use historical data for a large sample of major banks to generate a conservative approximation of the additional amount of capital that banks would need to raise to meet the new regulatory requirements, taking the potential impact of current efforts to enhance G-SIBs' total loss-absorbing capacity into account. To provide a high-level proxy for the effect of changes in capital allocation and bank business models on the estimated net benefits of regulatory reform, we simulate the effect of banks converging towards the "critical" average risk weights (or "density ratios") implied by the combined risk-weighted and leverage ratio-based capital requirements. While keeping in mind that quantifying the regulatory impact remains subject to caveats, the results suggest that Basel III can be expected to generate sizeable macroeconomic net benefits even after the implied changes to bank business models have been taken into account.

Keywords: Basel III; density ratio; global systemically important banks; leverage ratio; macroeconomic impact; risk-shifting (search for similar items in EconPapers)
Pages: 31 pages
Date: 2016-11
New Economics Papers: this item is included in nep-cba and nep-rmg
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