Introduction
Banks are critical institutions to a nation’s economy because they act as intermediaries in an economy by playing the centre role of exchanging money between the depositors or lenders and borrowers (Mankiw, 2011). Banks collect savings from households, businesses, provide credits, carry out the system of payments, and they also manage financial transactions (Mankiw, 2011).
Banks in developing nations are normally the hub of financial market, while in the developed nations with advanced financial markets banks play the role of the primary suppliers of the financial services (Mankiw, 2011). The banking sector must be regulated in order to have an effective intermediation process; this includes bank regulations like the Basel rules. Thus, this paper will discuss the recent bank regulations know as the Basel III (Mankiw, 2011).
Basel III
Basel III was recently introduced globally to regulate the bank capital sufficiency and liquidity decided upon by the Basel Committees on Banking Supervision’s members (Slovik and Cournéde, 2011). The new regulations were developed as a result of insufficiency in the financial regulation disclosed by the recent credit crisis. The Basel III toughens the bank capital needs and institutes new regulatory needs on the liquidity of the bank as well as the bank leverage (Slovik and Cournéde, 2011).
The Basel III recommends numerous newer leverage, liquidity, and capital standards to support the supervision, risk management and regulation of banking industry (Slovik and Cournéde, 2011). The capital buffers and capital standards will need banks to maintain extra capital and superior capital quality compared to the regulations of the present Basel II.
The new liquidity ratios and leverage institute a non-risk measure that complements the needs for risk-based minimum and measures that makes sure that sufficient financing is sustained in the circumstances of crisis (Slovik and Cournéde, 2011).
The execution of Basel III will decrease the GDP growth rate in the medium-term by a range of 0.05% to 0.15% per year (Slovik and Cournéde, 2011). The economy’s output will mostly be affected by a rise in the lending spread if the bank increases the financing costs as a result of superior capital needs to their clients.
So as to meet the capital needs by the year 2015, banks are now expected to raise the lending spreads by 15 bp on average and the capital needs by the year 2019 (Slovik and Cournéde, 2011). This means that the effect on the GDP growth rate would presume no active reaction from the monetary policy. Thus, the economic growth will deteriorate in the medium-term as a result of the increase in the cost of borrowing.
Therefore, it will be hard for the businesses and individuals to borrow meaning that the cost of production will also increase. The consumers will be charged high prices for goods consumed which means that investments will reduce drastically and eventually the banks will have no funds (deposits) to lend to businesses (Slovik and Cournéde, 2011). Based on the report by Bryant (2010) Basel III will also reduce job creation since only 9.7 million jobs will be created within the period of implementation.
The Banking Industry Group has been pushing to see that the Basel III proposal implementation was delayed in order to avoid these effects. For instance, the European region would be most affected by these new rules, since its economic growth would reduce by 0.9% points every year thereby reducing the GDP by $920 billion or 4.3% by the year 2015 (Slovik and Cournéde, 2011).
Equally, the US’s GDP will reduce by 2.6% ($951 billion), while Japan’s GDP will reduce by 1.9% ($130 billion) (Slovik and Cournéde, 2011).
In conclusion therefore, the world needs to have a banking system that is highly regulated in order to avoid another crisis. But this means that all sectors, both private and governmental will have to pay a price which is high cost of borrowing, high prices for goods, and lack of funds to finance business investments as a result of low savings.
References
Bryant, C. (2010). Bankers fear effect of Basel rules. Web.
Mankiw, N. G. (2011). Principles of macroeconomics (6th). Ohio: South-Western, Cengage Learning.
Slovik, P. and Cournéde, B. (2011). Macroeconomic impact of Basel III. OECD Economics Department Working Papers, No. 844, OECD Publishing.