Basel 3 standards to lower GDP output by 0.22% over nine years
The stronger capital standards outlined in Basel 3 will lead to a decline in the level of gross domestic product output of about 0.22%, according to a report from the international group of economists formed to study the implications of the new requirements. The Financial Stability Board and the Basel Committee on Banking Supervision said the transition to the new capital requirements for global banking "is likely to have a modest impact on aggregate output." The Macroeconomic Assessment Group of the two bodies concluded the maximum GDP impact will occur after 35 quarters, or nearly nine years, of implementation of the Basel 3 guidelines that were announced in September. "In terms of growth rates, annual growth would be 0.03 percentage points below its baseline level over this period," the study by the group found. "That would then be followed by a recovery in GDP toward the baseline. A faster implementation period would lead to a slightly larger reduction from the baseline path, with the trough occurring earlier, resulting in a somewhat greater impact on annual growth rates." The group said their assessment assumes banks implement the new capital conservation buffer of 2.5% within the eight-year plan set by the supervisory committee. But if banks decide to adopt the new standards sooner, the group said the impact on GDP will increase to 0.29% in the 10th quarter of implementation. "These effects would also be accentuated to the degree that banks choose to hold an additional voluntary equity capital buffer above the new standards," the group said. Banks have until Jan. 1, 2019, to fully comply with the new standards. In late October, the Basel Committee on Banking Supervision questioned whether financial institutions will be able to meet the capital requirements mandated in Basel 3. The New York Times is reporting that the world's largest banks are billions of dollars short of meeting the required reserve levels. Write to Jason Philyaw.