One of the more contentious aspects of the new Basel III capital rules is the surcharge placed on the world’s largest banks. These banks, also referred to as global systemically important banks (G-SIBs), would be required to hold an additional 1% to 2.5% on their balance sheets.The most vocal critic of the surcharge has been JP Morgan CEO Jamie Dimon, who has called the rule “anti-American.”
One of the risks of raising capital standards is that it could slow economic growth.
However, The Bank of International Settlements thinks it’s a risk worth taking. The Financial Stability Board and the Basel Committee formed the Macroeconomic Assessment Group (MAG) to explore the matter. Their findings are summarized in a new BIS report titled Assessment of the macroeconomic impact of higher loss absorbency for global systemically important banks.
The MAG assessment concludes that the transition to stronger capital standards on G-SIBs is likely to have at most a modest impact on aggregate output, while the benefits from reducing the risk of damaging financial crises will be substantial.
Raising capital requirements on an illustrative group of potential G-SIBs by one percentage point over eight years is estimated to lower GDP by less than one one-hundredth of a percentage point (0.01%) per year during the implementation period.
According to the report, at most GDP would fall “0.34% relative to its baseline level.” But the reduced risk of a systemic crisis is expected to very positive in the long run.
The MAG estimated that the Basel III and G-SIB proposals combined contribute a permanent annual benefit of up to 2.5% of GDP – many times the costs of the reforms in terms of temporarily slower annual growth.
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