Global banking regulators have published the results of a cost-benefit analysis of higher capital and liquidity requirements for banks which concludes that output would be affected by tougher rules, but that the benefits of a more stable financial system outweigh those costs.

Reports were published Wednesday by the Financial Stability Board and the Basel Committee on Banking Supervision examining the effects of the imposition of new bank capital and liquidity standards. The Bank of Canada is slated to publish its own study on Wednesday, too.

The Basel Committee’s assessment of the long-term economic impact of these changes finds that “there are clear net long term economic benefits from increasing the minimum capital and liquidity requirements from their current levels in order to raise the safety and soundness of the global banking system.”

It says that the benefits of higher capital and liquidity requirements accrue from reducing the probability of financial crisis and the output losses associated with such crises. “The benefits substantially exceed the potential output costs for a range of higher capital and liquidity requirements,” it adds.

The FSB’s assessment of the transition costs to tougher regulations concludes that the transition to stronger capital and liquidity standards “is likely to have a modest impact on aggregate output.”

It says that if higher requirements are phased in over four years, each percentage point increase in banks’ ratio of tangible common equity to risk-weighted assets will lead to a decline in GDP of about 0.20%. The annual growth rate would be reduced by an average of 0.04 percentage points over a four and a half year period, it adds.

Additionally, it says that a 25% increase in liquid asset holdings is found to have an output effect of less than half that predicted for increases in capital ratios. The projected impacts arise mainly from banks passing on higher costs to borrowers, which results in a slowdown in investment, it says.

A two-year implementation period leads to a slightly larger reduction in GDP, with the trough occurring after two and a half years, while extending the implementation period beyond four years makes little difference, it finds. Nevertheless, it also finds that in every scenario, GDP returns to its baseline path in subsequent years.

IE