New bank rules 'will cut output by fraction'

The new "Basel III" rules for banks' capital and liquidity will tighten lending and reduce investment during a transition period, but to a much lower degree than forecast by banks, Basel and the Financial Stability Board (FSB) said.

"Macroeconomic costs of implementing stronger standards are manageable... while the longer-term benefits to financial stability and more stable economic growth are substantial," FSB chairman Mario Draghi said in the statement.

Assuming the rules are phased in over four years and banks' capital levels rise by two percentage points, output would on average decline by 0.38 per cent compared to a baseline scenario, according to an analysis by the FSB, a body tasked by the G20 to coordinate a string of market reforms including Basel III.

This is only an eighth of the 3.1 per cent output loss over five years due to Basel III and other measures which bank lobby group The Institute of International Finance (IIF) has predicted for the United States, the eurozone and Japan.

The Bank of Canada said the new rules would benefit Canada's economy significantly from reduced likelihood of fallout from foreign financial crises. It saw gains even with conservative benefit assumptions and the most extreme cost estimates.

Once banks have completed the switch, the new rules will help to avoid or at least moderate the boom-and-bust cycles which first pump too much capital into the wrong places and then cause huge output losses when the bubble bursts, Basel said.

Eliminating savage downturns such as that seen after the 2008 financial crisis could in the long-term add as much as 1.8 per cent economic growth per year, Basel said in a second study trying to gauge the long-term benefits of the new rules. "Economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Basel chairman Nout Wellink.