Assessing the Impact of Basel III: Review of Transmission Channels and Insights from Policy Models

Olivier de Bandt, C. Bora Durdu, Hibiki Ichiue, Yasin Mimir, Jolan Mohimont, Kalin Nikolov, Sigrid Roehrs, Jean-Guillaume Sahuc, Valério Scalone and Michael Straughan
Additional contact information
Hibiki Ichiue: Keiō Gijuku Daigaku = Keio University [Tokyo]
Sigrid Roehrs: Deutsche Bundesbank - Deutsche Bundesbank
Valério Scalone: European Central Bank - European Central Bank
Michael Straughan: Bank of England - Bank of England

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Abstract: This paper (i) reviews the different channels of transmission of prudential policy highlighted in the literature and (ii) provides a quantitative assessment of the impact of Basel III reforms using several policy-oriented DSGE models. It shows that the long-term effects on GDP of higher capital requirements are positive when the associated benefits are accounted for in addition to their costs. However, the results crucially depend on assumptions about crisis probability and severity. For liquidity regulations, only models capturing benefits of increased liquidity (e.g., preventing bank runs) show a net benefit.

Date: 2024-02
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Published in International Journal of Central Banking, 2024, 20 (1)

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