Date Added: Feb 2011
The authors assess the long-term economic impact of the new regulatory standards (the Basel III reform), answering the following questions. What is the impact of the reform on long-term economic performance? What is the impact of the reform on economic fluctuations? What is the impact of the adoption of countercyclical capital buffers on economic fluctuations? The main results are the following. Each percentage point increase in the capital ratio causes a median 0.09 percent decline in the level of steady state output, relative to the baseline; the reform should dampen output volatility; the magnitude of the effect is heterogeneous across models; the median effect is modest and the adoption of countercyclical capital buffers could have a more sizeable dampening effect on output volatility.