ECB Study Assesses Impact of Basel III Finalization Package

Additionally, the article in the Macroprudtial Bulletin also concludes that the transitory economic costs of the plain vanilla Basel III approach are outweighed by its permanent long-run benefits. The costs of the phase-in of the plain vanilla Basel III finalization are moderate and amount to a transitory reduction of Gross Domestic Product (GDP) growth by 0.1 percentage points from the second to the fourth year after its initialization, and eventually disappear in the seventh year after the introduction of the reform. Completing the Basel III reforms will benefit long-term bank solvency and profitability. Banks will be in a better position to absorb losses in adverse economic conditions and will face lower funding costs. However, implementing EU-specific modifications to the Basel III reform, such as the small and medium-size enterprise (SME) supporting factor, credit valuation adjustment (CVA) exemptions, and discretion with regard to the operational risk capital charge reduce the already moderate transitory costs of the reform, although they also reduce its long-run benefits. Approaches that, in addition, modify the implementation of the output floor fail to further reduce the short-term economic costs of the reform while again decreasing its long-term benefits. The long-run benefits from the least binding output floor implementation (the parallel stacks approach) are negligible, amounting to only a quarter of the benefits under the plain vanilla Basel III finalization.

Related Links

• Article in Macro-Prudential Bulletin
• Occasional Paper (PDF)

Keywords: Europe, EU, Banking, Leverage Ratio, Macro-Prudential Policy, Growth at Risk, CVA, Regulatory Capital, Basel, ECB