Basel III: a macro-economic cost-benefit analisys

MARCHESI M;DE LISA, RICCARDO;ZEDDA, STEFANO;CAMPOLONGO F;CARIBONI J.

2013-01-01

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Abstract

The present work proposes a new methodology to estimate the reduction in the probability of occurrence of a systemic banking crisis entailed by the implementation of the Basel III framework for banking regulation. Macro-economic impacts are then evaluated using a stylized representation of the economy. The macro-economic benefits arise from the avoidance of the expected fall in GDP that follows systemic banking crises, thanks to the reduction in the probability of having a crisis; costs derive instead from the increase in lending rates introduced by banks as a reaction to the tighter Basel III capital requirements, that in turn induce a decrease in non-financial firms’ investments and a drop in GDP We find that the net benefits of implementing Basel III are always positive, and their aggregate value is larger in the scenario where the capital conservation buffer is introduced