Magazine article American Banker

Reports Dispute Claims New Standards Will Hurt Economy

Magazine article American Banker

Reports Dispute Claims New Standards Will Hurt Economy

Article excerpt

Byline: Donna Borak

WASHINGTON - Adoption of higher capital and liquidity requirements will not handicap the global economy in the long term, but it will help stave off economic crises, international regulators said Wednesday.

The Basel Committee on Banking Supervision and the Financial Stability Board released two widely anticipated reports that they said refute claims that higher capital and liquidity standards will harm the economy. "The analysis shows that the macroeconomic costs of implementing stronger standards are manageable, especially with the appropriate phase-in arrangements, while the longer-term benefits to financial stability and more stable economic growth are substantial," Mario Draghi, chairman of the Financial Stability Board and governor of the Bank of Italy, said in a press release.

Still, one report acknowledged that increased capital requirements could hurt banks and consumers in the short term. The report said that it will end up being more expensive for banks to fund assets with capital than with deposits or wholesale debt. That means banks facing stronger capital requirements will increase capital levels by retaining earnings and issuing equity and reducing nonloan assets, the report said.

That could result in higher interest rates for borrowers and a reduction innew lending.

"If the transition period is short, banks may choose to curtail credit supply in order to lift capital ratios and adjust asset composition and holdings quickly," the report said.

Still, regulators argue that in future years banks will become less risky, helping to counter any negative impact.

"The economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Nout Wellnick, chairman of the Basel Committee and president of the Netherlands Bank. "These benefits result not only from a stronger banking system in the long run, but also from greater confidence in the stability of the financial system as soon as implementation starts. …

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