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
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.
The General Board of the European Systemic Risk Board (ESRB), at its December meeting, issued an updated risk assessment via the quarterly risk dashboard and held discussions on key policy priorities to address the systemic risks in the European Union.
The Financial Conduct Authority (FCA) is seeking comments, until December 21, 2022, on the draft guidance for firms to support existing mortgage borrowers.
The Financial Stability Board (FSB) published a report that assesses progress on the transition from the Interbank Offered Rates, or IBORs, to overnight risk-free rates as well as a report that assesses global trends in the non-bank financial intermediation (NBFI) sector.