Consultant Copenhagen Economics has calculated that implementation of the Final Basel III Framework will cut 0.4% off the EU economy annually over the long term as it restricts household and business access to capital, and causes a decrease in investment levels.
The warning comes in a report sub-titled 'Impact on the banking market and the real economy' (see link below), which goes on to state that "our assessment is that the proposed solution is not consistent with three key principles that the G20 provided as guidance for implementation at a global level".
These principles include: Support better alignment of risk assessments, Should not lead to a significant increase in capital requirements, and Aim for a level playing field at global level.
As proposed by the EU's Banking Authority, EBA, on a mandate from the European Commission, Copenhagen Economics concludes that the implementation of the Framework will create more costs than benefits across Europe.
The flow of capital to the real economy will be hit by the regulatory need for banks to maintain a higher level of capitalisation ongoing, in line with the objective of maintaining so called systemic buffers. To achieve higher capitalisation, banks either have to deleverage or increase the amount of CET1 capital. Either way, the changes incurr costs. Copenhagen Economics estimates that the EU's banks will pass on some €43bn in costs to customers. Household mortgages, loans to SMEs, and loans to corporate customers will all become more expensive.
In turn, the increased cost of capital will hurt levels of investment in Europe.
"Concretely, we estimate that, every year, investments will be some €70bn lower, corresponding to a decline of around 1.8%. Accumulated over the ten-year period, the EU economy sees a reduction in investments of around €700. Of the total accumulated reduction in investments of €700bn, SMEs account for some €220bn and corporates account for the remaining €480bn."
Commenting on the report, Finans Danmark, which represents banks, credit institutions and asset managers in Denmark, said there was a "serious risk of damaging economic growth" in Europe, according to Ulrik Nødgaard, managing director. He added that the massive storage of capital required by the regulation also will limit the ability of credit institutions to take part in the ongoing greening of the economy - the cut to investments should be seen in context of the European Commission's estimate that annual €180bn required to make Europe's economy greener.
"Finans Danmark, together with politicians, [the Danish FSA] Finanstilsynet and [the central bank] Nationalbanken wants to continue the constructive dialogue with European authorities about the European implementation of Basel IV. The goal is to ensure financial regulation, which balances considerations between on the one hand securing a strong and resistant financial sector, and on the other hand supports economic growth and employment."
To view the full report, visit https://www.ebf.eu/ebf-media-centre/copenhagen-economics-presents-its-impact-analysis-of-proposed-basel-iii-finalisation-in-eu/ or click the image below to open up a pdf.