As the Basel III Accords near completion, the Basel Committee for Banking Supervision and Financial Stability Board have taken a pre-emptive strike against those who claim that higher capital requirements and more conservative banking will hurt future growth. Of course, the argument goes that if banks have to hold more cash, then they will lend less, and growth will slow. Not so, say the global regulators -- or at least not really:
The FSB and Basel Committee said that for every 1% increase in the ratio of capital to assets that banks are asked to keep, growth would fall by only 0.04% a year over 4½ years. They said an increase of 25% in liquid assets held by banks would have less than half of the effect of a 1% rise in capital ratios over the same period. The regulators intend to phase in the new standards over a period of time, once they are finally determined. The FSB and Basel Committee said that the effect on output would be larger if the requirements were phased in over a shorter period, such as two years, but argued that in all the scenarios it evaluated, economic output would make good the shortfall in the longer term.
Read the full story at the Wall Street Journal.
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