Better late than never

19 August 2010 By George Hay Follow @gfhay

The body that sets global banking rules has concluded the economic impact of new capital targets will be much lower than the industry claims. The findings will not stop some reforms being watered down or delayed. But they strengthen the case for raising banks’ capital ratios.

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The Basel Committee on Banking Supervision has concluded that increasing banks' core Tier capital ratios by 1 percent, and increasing their liquid assets by 25 percent, would shrink global GDP by 0.19 percent over the next four and a half years.

The longawaited study contradicts earlier predictions by the Institute of International Finance, the lobbying group for large global banks. In June, the IIF predicted that GDP would decline by 3.1 percent over five years if Tier 1 ratios were increased by 2 percentage points.

The Basel Committee's study attempted to estimate the effects of tighter regulation on the cost of credit. The report concluded that wider lending spreads would reduce GDP by 0.16 percent by the end of 2014.

The Basel Committee said that the large difference between its study and the IIF's estimate were because the industry had assumed banks would try to return to leverage levels that prevailed immediately before the financial crisis.

The committee also said the industry had assumed a relationship between credit growth and GDP based on boom conditions just prior to the crunch, and that banks' return on equity would rise as government support mechanisms were withdrawn, rather than staying permanently lower.

The committee will announce the new minimum level for banks' core Tier 1 ratios in the Autumn.

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