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27 October 2011

ICFR: What is the price of Basel III? An analysis of the impact (and the impact studies) of Basel III on the real economy


The International Centre for Financial Regulation finds that the Basel III agreement represents the linchpin of the attempt to reconstruct the banking system on more solid foundations. But what is the toll that the implementation of this agreement will take on the real economy?

This study will attempt to shed light on the gaps existing in the outputs of the different studies that have sought to quantify the impact of Basel III by illustrating how these are sensitive to four key sets of assumptions underlying these results:

  • First, this study will analyse the assumptions made by the different studies regarding how much capital individual banks will need to raise to implement the new regulatory regime.
  • Second, this study will discuss how the reactions by those financial institutions to the new requirements will influence the extent of the costs that will be internalised by banks or passed to the economy.
  • Third, this study will highlight the impact on the results that arises from their different regional coverage.
  • Fourth, some of the studies have gone beyond simply providing an estimate of the costs of implementing Basel III, and have weighted them against the benefits brought by the agreement. This paper will discuss how, in addition to the methodologies employed to calculate the costs, the methodologies employed to estimate the benefits of Basel III are similarly dependent on the assumptions.

As different countries are moving towards the implementation of Basel III, this study has investigated some of the main reports that have tried to quantify the impact that this regulatory framework will have on the real economy. In order to explain the widely divergent estimates of the costs of implementing Basel III, it is important to consider how the estimates of the costs and benefits of Basel III are sensitive to some critical assumptions underlying these studies.

This analysis has traced the origin of some of the disagreements in the different assumptions in this studies regarding 1) what elements of the regulatory regime are implemented; 2) the adjustment strategies that will be put in place by banks to meet the regulatory requirements; 3) the regional coverage of these analyses; and 4) the extent of the benefits from implementing the agreement.

The impact that these assumptions have in significantly altering the results suggests that a note of caution is required when interpreting the implications of these studies.


Full working paper



© ICFR - International Centre for Financial Regulation


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