Macroeconomic Consequences of New Prudential Regulation in the Banking Sector (original) (raw)
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The recent financial crisis, that has left its mark on the global economy, highlighted the problems of ensuring the stability of the banking sector. At the end of 2010 year, G20 meeting has determined the need of approval of new standards of banking regulation and international settlement named Basel III. The present study is an attempt to present the changes imposed to the new supervisory agreement and to determine the preparation of banking sector for implementation of new provisions.
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This conference, 2011
Growth with equity is the foremost objective in all economies in the world today, especially in the emerging market economies (EMEs), where the poor still make up a sizeable proportion of the population. To ensure growth and development with equity, financial sector policies are expected to be tuned to sub-serve these broad objectives. Though there is no unanimity among economists, including Nobel laureates, on the relevance of finance for growth, the crisis has provided ample evidence that a stable financial system will have a positive impact on both growth and equity and an unstable one will harm both these economic objectives. There could, however, be conflicts in the short and medium term between the objective of financial stability on the one hand, and growth and equity on the other hand. But there cannot be any dispute that in the long term all three objectives are simultaneously achievable. This paper highlights the interaction between prudential and other financial sector and macroeconomic policies and goes on to review financial sector regulation in the pre-crisis, mid-crisis and post-crisis periods, with a special focus on issues specific to the EMEs in the implementation of Basel II and III. The paper argues that even though the EMEs find implementing the Basel capital regulations a major challenge, in the long run following these standards will contribute to strengthening their banking systems. The paper also emphasises that some aspects of regulation can be oriented towards achieving the development objectives of EMEs without necessarily sacrificing prudent regulation and financial stability considerations, and that EMEs can supplement their development objectives with other well designed financial sector policies.
Social Science Research Network, 2014
The financial crisis 2007-2009 will not be forgotten in a hurry because of its impact on the global financial system almost replicating the Great Depression. Major and causal factors contributed to the financial crisis, and this prompted the establishment of Basel III to contain the crisis. Basel III introduced improved capital and liquidity rules, but still could not contain the crisis. This leaves regulators with questions of how to prevent another financial crisis in the future. Evidences suggest that the financial market is evolving because of its complex and changing nature, and so are the international banking regulations (Basel I, Basel II and Basel III) that support the system in terms of maintaining economic and financial stability. It is clear that Basel III will not stop the next financial crisis even though the Basel accords continue to evolve in response to maintaining economic and financial stability, with the core purpose of preventing another financial crisis. Uncertainties lies ahead, and regulators cannot be sure of what will likely cause the next crisis, but indications suggest that the financial markets and international banking regulations in the form of Basel accords will continue to evolve.
Financial Sector Regulation and Implications for Growth
RePEc: Research Papers in Economics, 2012
Growth with equity is the foremost objective in all economies in the world today, especially in the emerging market economies (EMEs), where the poor still make up a sizeable proportion of the population. To ensure growth and development with equity, financial sector policies are expected to be tuned to sub-serve these broad objectives. Though there is no unanimity among economists, including Nobel laureates, on the relevance of finance for growth, the crisis has provided ample evidence that a stable financial system will have a positive impact on both growth and equity and an unstable one will harm both these economic objectives. There could, however, be conflicts in the short and medium term between the objective of financial stability on the one hand, and growth and equity on the other hand. But there cannot be any dispute that in the long term all three objectives are simultaneously achievable. This paper highlights the interaction between prudential and other financial sector and macroeconomic policies and goes on to review financial sector regulation in the pre-crisis, mid-crisis and post-crisis periods, with a special focus on issues specific to the EMEs in the implementation of Basel II and III. The paper argues that even though the EMEs find implementing the Basel capital regulations a major challenge, in the long run following these standards will contribute to strengthening their banking systems. The paper also emphasises that some aspects of regulation can be oriented towards achieving the development objectives of EMEs without necessarily sacrificing prudent regulation and financial stability considerations, and that EMEs can supplement their development objectives with other well designed financial sector policies.
Global Regulatory Changes to the Banking Industry after the Financial Crisis: Basel III
The enforcement of new regulations has traditionally been the governments’ strategy to respond to episodes of financial stability. That was the case in, for example, the United States after the market crash that detonated the 1930s “Great Depression”2, with the Glass-Steagall Act, which separated commercial banks from investment banks to eliminate the risk that a stock market collapse could generalize and affect the banking industry. Many years later, the scandals of the Savings and Loans institutions, during the late 1980s, brought about more restrictive regulations on that sector; or the Enron, Xerox, Tyco and others’ fraudulent scandals at the beginning of the 21st century that were at the origin of the Oxley-Sarbanes legislation. Recently, the “Subprime- Mortgages Financial Crisis” of 2007-2009, once again, provoked an encompassing financial sector regulatory revamp in major industrialized countries, home of the largest multinational banks, which were the intermediaries most affected by the crisis, provoking ripple effects across many other countries, and raising the odds that, for the first time, the financial industry’s regulatory framework will finally achieve a supra- national status3. It would be a logical corollary to the enormous economic costs and the dramatic loss of confidence that resulted from the global financial crisis. An increasingly globalized financial industry desperately needs a full revamping of its regulatory framework.
Festschrift zum 60-jährigen Bestehen des Europa-Instituts, 2011
A Ad dd dr re es ss s P Pa an nt te ei io on n U Un ni iv ve er rs si it ty y o of f S So oc ci ia al l a an nd d P Po ol li it ti ic ca al l S Sc ci ie en nc ce es s D De ep pa ar rt tm me en nt t o of f I In nt te er rn na at ti io on na al l a an nd d E Eu ur ro op pe ea an n S St tu ud di ie es s 1 13 36 6 S Sy yg gr ro ou u A Av ve e. . G GR R--1 17 76 67 71 1, , A At th he en ns s G Gr re ee ec ce e Abstract "Basel III" regulatory framework is comprised by two reports. These reports are the result of extensive consultations that have taken place since 2008, namely in the middle of the recent (2007-2009) international financial crisis. Their provisions lay down a new international regulatory framework for international banks, by reforming the existing one, in order to strengthen the stability of the banking system.
BASEL BANKING NORMS: THEIR EFFICACY, ANALYSIS IN THE GLOBAL CONTEXT & FUTURE DIRECTION
This article aims to first build a deeper understanding of the emergence of Basel banking norms (Basel I), and the transition to each of the subsequent regulations (Basel II and Basel III). The primary purpose of developing this understanding is to further analyze the extent of effectiveness of the Basel norms. To explore how such regulations impact an economy, we have specifically looked at four economies of the world, which are geographically apart, in this context. The idea here is to study how, for instance, banking institutions have shaped up to these norms – and whether the effects were favorable or adverse. We then conclude by conceptually looking at the future direction of regulations such as the Basel norms in the banking industry.
Redefinition of Macroeconomic and Macroprudential policy and BASEL III Concept
2015
As an essential tool proceeding the objective function in the period before the global economic crisis (2008), the focus of central banks and monetary policy has been to provide price stability over the policy interest rate. This led to emphasizing the role of the credit channel on monetary policy impact of the economy through the quantity of reserves and return-bank credit to the real sector. The exception to this rule was the policy of double pillar of the ECB, which paid special attention to the amount of credit in the economy. The regulation and supervision that were focused on individual financial institutions and markets as well as measuring their impact on the funding stability, were largely ignored. Given the enthusiasm for financial deregulation, the usage of prudential regulation for counter cyclical purposes was considered improper interference in the functioning of credit markets. Simultaneously, with the positions of sharp political limitations, the power of the impact ...
Bank Behavior in Response to Basel Iii: A Cross-Country Analysis
IMF Working Papers, 2011
The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. This paper investigates the impact of the new capital requirements introduced under the Basel III framework on bank lending rates and loan growth. Higher capital requirements, by raising banks' marginal cost of funding, lead to higher lending rates. The data presented in the paper suggest that large banks would on average need to increase their equity-to-asset ratio by 1.3 percentage points under the Basel III framework. GMM estimations indicate that this would lead large banks to increase their lending rates by 16 basis points, causing loan growth to decline by 1.3 percent in the long run. The results also suggest that banks' responses to the new regulations will vary considerably from one advanced economy to another (e.g. a relatively large impact on loan growth in Japan and Denmark and a relatively lower impact in the U.S.) depending on cross-country variations in banks' net cost of raising equity and the elasticity of loan demand with respect to changes in loan rates. JEL Classification Numbers: E5, G2
Basel III: Long-term Impact on Economic Performance and Fluctuations
The Manchester School, 2014
We assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions: 1) What is the impact of the reform on longterm economic performance? 2) What is the impact of the reform on economic fluctuations? 3) What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following: 1) Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steadystate output, relative to the baseline. The impact of the new liquidity regulation is of a similar order of magnitude, at 0.08 percent. This paper does not estimate the benefits of the new regulation in terms of reduced frequency and severity of financial crisis, analyzed in Basel Committee on Banking Supervision (2010b). 2) The reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest.