BIS published a working paper that assesses the impact of Basel III reforms from a macroeconomic perspective. The paper presents the results of simulation exercises to compare some of the models surveyed and in use by regulators. The aim of the paper is to support efforts to build models that can be used to estimate and evaluate the impact of post-2010 reforms. The exercise reveals that whenever the costs and benefits of regulation are introduced in the model, the effects of Basel III are positive on GDP. Additionally, all models exhibit a decrease in volatility when moving from Basel II to Basel III, but the impact is not very sizable.
The first part of the paper reviews the different channels of transmission of financial shocks (including regulatory changes) highlighted in the literature in the past 15 years. While a very large number of new models have been made available since the Committee's assessment of the long-term economic impact of stronger capital and liquidity requirements, standard models still concentrate mostly on capital requirements and more rarely on liquidity. Alternative models consider other policies (unconventional monetary policies) as well as new, highly relevant challenges like interactions with the shadow banking system. However, the latter models are not yet sufficiently operational to allow an empirical assessment of the impact of the regulatory changes. The second part of the report provides a simulation of regulatory scenarios replicating the implementation of Basel III reforms, using "off-the-shelf" macro-finance models. These simulations provide novel estimates of the impact of Basel III.
The models are used to provide a first assessment of the resilience of the post-Basel III banking system to very large shocks replicating the current COVID-19 environment. While significant advances have been made for the modeling of solvency requirements, the assessment of liquidity requirements is still an area for research, as most models still concentrate on the costs of liquidity. Taking stock of the literature review and the recent advances in modeling, the next stage could be to build a quantitative model that explicitly considers the most important costs and benefits of capital and liquidity regulations. These costs and benefits have already been identified (such as reduced crisis probability and crisis severity against higher spreads and lower output in normal times). Both capital and liquidity regulations should be incorporated into the model. The best (and the most time-efficient) strategy going forward can be to take a workhorse model with the most important ingredients included among the papers reviewed here and incorporate some key features if necessary.
Keywords: International, Banking, Basel, Macroeconomic Impact, Regulatory Capital, Liquidity Requirements, Credit Risk, Liquidity Risk, Macroeconomic Model, BIS
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