Interaction, Coherence and Overall Calibration of Post Crisis Basel Reforms

Massive changes have occurred in global financial regulation since the financial crisis, much of it led by the Basel Committee on Banking Supervision, in particular the sharp increase in banks’ required capital and liquidity levels.

This report provides a comprehensive analysis of the potential costs of the new Basel standards on lending and capital markets. The study does not address the very considerable benefits from increased global financial stability, so consideration of these costs should not be viewed as an indication that costs outweigh benefits overall from the new Basel standards.

The authors conducted a very comprehensive review of the existing literature on the impacts of the Basel standards, reviewing about 100 academic papers, more than 100 letters or studies by the industry, and nearly 200 references and research papers from official sources. Overall, the literature showed:

  • The median estimates from the studies show funding cost increases for loans of 60-84 bps, depending on the region. There is considerable variation across the studies. Different types of lending are affected to greater or lesser extents.
  • These estimates do not include ongoing Basel workstreams sometimes known as “Basel IV”, which could add substantially to these funding costs.
  • All studies which have considered the matter expect the Basel rules to reduce bank lending or to hold down its growth to some extent.
  • Basel standards are expected to reduce market liquidity, despite some offsetting developments. There is some evidence this is already happening, although it is not conclusive. It is likely that these impacts will increase substantially in the next few years.
  • There are a number of areas where the rules may be working at cross purposes or be mis-calibrated. To the extent there are problems, they could often be fixed by changes to the details or modest recalibration of quantitative requirements.

Oliver Wyman undertook this work under a commission from the Global Financial Markets Association, but the analysis and opinions expressed here are solely those of the authors and do not necessarily reflect the views of Oliver Wyman or the Global Financial Markets Association.

Interaction, Coherence and Overall Calibration of Post Crisis Basel Reforms