Assessing the macroeconomic impact of the transition to stronger capital and liquidity requirements - Interim Report

August 2010

The Basel Committee on Banking Supervision and the Financial Stability Board set up the Macroeconomic Assessment Group (MAG) to assess the macroeconomic effects of the transition to strengthened capital and liquidity regulations. The MAG comprises economic modelling experts from central banks and other authorities. In its Interim Report, the MAG concludes that, for each percentage point increase in the target capital ratio implemented over a four-year horizon, the level of GDP relative to the baseline path declines by a maximum of about 0.19%. The maximum GDP loss occurs four and a half years after the start of implementation, after which GDP recovers towards its baseline path. The associated rise in banks' lending rates would amount to about 15 basis points for each percentage point increase in capital. These costs will slowly dissipate during and after the phase-in, returning GDP to the path it would have followed in the absence of the changes. The impact of the new regulatory framework on specific national financial systems will depend on current levels of capital and liquidity in those systems, and on the consequences of changes to the definitions used in calculating the relevant regulatory ratios. These results imply that the reforms proposed by the Basel Committee are likely to have, at most, a modest impact on aggregate output, provided that appropriate transition arrangements are in place.

Press release on the publication of the MAG report and "An assessment of the long-term economic impact of stronger capital and liquidity requirements" prepared by the Basel Committee