Oxford Economics Study Reaffirms the Negative Impact of Increased Bank Capital and Liquidity Requirements on Economic Growth

Date Published 4/12/2013
Author Marja Hoek-Smit

A study by Oxford Economics, released by The Clearing House, analyzed the potential effects of bank capital and liquidity regulation under Basel III assumptions in five key studies – the IMF study of Elliot et al. (2012), the study by the IIF (2011), the OECD study of Slovik & Cournede (2011), the BIS/MAG studies (2011), and the Bank of England study of Miles et al. (2011). Four of these studies were considered ‘official’ efforts (i.e. from international regulatory and financial organizations) while the IIF study was from an organization representing global financial institutions. Oxford focused on three key factors by which regulations could impact bank behavior and the economy:
  • increased capital levels that push up the cost of bank credit (bank lending rates);
  • requirements to hold more liquid assets, which may also raise the cost of bank credit; and
  • shrinking of risk-weighted assets (RWA) by banks to try to meet higher minimum capital ratios, which could lead to a rationing of the quantity of credit, or increase the cost of credit, as other credit providers could require higher rates to hold the assets.
Oxford then sought to improve the assumptions of these prior studies to align them with US economic and regulatory realities.They estimate that a US “worse case” scenario of higher capital and liquidity requirements could lead to a drop in GDP of 2 percent and a loss of one million jobs over none years.

The Oxford analysis used the Oxford Global Economics Model widely used to estimate future macro-economic effects of policy and a loan pricing model commonly used in academic studies evaluating the effects of capital regulations. It includes assumptions on cost of equity, cost of debt, credit spreads, administration costs, baseline capital levels, size of capital buffers, size of liquidity requirements, and length of transitional period for phase-in.

Oxford concludes: “Our study’s findings clearly demonstrate the need for any regulatory program to be carefully structured to avoid any unintended consequences to economic growth and employment”.

Link to Paper

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