Final report on the assessment of the macroeconomic impact of the transition to stronger capital and liquidity requirements

17 December 2010

The Financial Stability Board (FSB) and Basel Committee on Banking Supervision (BCBS) concluded their assessment of the macroeconomic impact of the transition to the new bank capital and liquidity standards. 

The assessment, produced by the joint FSB-BCBS Macroeconomic Assessment Group (MAG) in close collaboration with the International Monetary Fund, is summarised in the MAG's final report, Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements. The report provides an assessment of the transitional impact of the implementation of the stronger requirements set out in the 12 September statement of the Governors and Heads of Supervision (GHOS). In August, the BCBS released a report, An assessment of the long-term economic impact of stronger capital and liquidity requirements, which assessed the net economic impact of stronger capital and liquidity reforms once implementation is complete.

The MAG Final Report extends the analysis in the MAG's Interim Report along two dimensions. First, members examined the impact of the transition to stronger capital requirements assuming a transition period of eight years, in line with the transition path set out in the GHOS statement. Second, the final report makes use of an estimate of the December 2009 level of common equity capital relative to risk-weighted assets in the global banking system, based on the revised definitions in the new framework, and compares this to what will be required under the agreed minimum ratio and capital conservation buffer. In doing so the report draws on the results of the Quantitative Impact Study (QIS) conducted recently by the Basel Committee and published yesterday. No additional analysis was undertaken on the impact of stronger liquidity requirements in this report, in view of the fact that the liquidity requirements are still subject to an observation period. Provisional estimates of the impact of stronger liquidity standards are contained in the Interim Report.

The MAG assessment concludes that the transition to stronger capital standards is likely to have a modest impact on aggregate output. While the findings in the Interim Report were presented in terms of the impact of a generic one percentage point increase in target capital ratios, the Final Report examines the impact of the overall increase in bank capital that will be needed to meet the new requirements, relative to the December 2009 global capital levels as reported by the QIS. The Final Report estimates that, if higher requirements are phased in over eight years, bringing the global common equity capital ratio to a level that would meet the agreed minimum and the capital conservation buffer, this would result in a maximum decline in the level of GDP, relative to baseline forecasts, of 0.22%, with a range of estimates around this point average. This maximum GDP impact would occur after 35 quarters (just under nine years). In terms of growth rates, annual growth would be 0.03 percentage points (or 3 basis points) below its baseline level over this period. That would then be followed by a recovery in GDP towards the baseline. A faster implementation period would lead to a slightly larger reduction from the baseline path, with the trough occurring earlier, resulting in a somewhat greater impact on annual growth rates.