Macroeconomic effects of Basel 3: estimates of the FSB and BCBS

Andrew Cornford, Observatoire de la Finance, November 2010

Overview

In December 2009 the Basel Committee on Banking Supervision issued a consultative document setting out proposals for strengthening regulation of banks’ capital and liquidity (widely referred to as Basel 3) in the light of lessons from recent experience, especially that of the current financial crisis, with the goal of improving the resilience of the financial system (BCBS, 2009). In the case of capital the proposals build on the framework of Basel 2 as set out in the 2006 draft (BCBS, 2006). Basel 2 has now been extended to include rules for the management of liquidity risk. This will be widely considered justified since crises or serious threats to banks’ solvency (and thus to the adequacy of their capital) are typically triggered by pressures on their liquidity positions in the form of difficulties over financing their portfolios of assets. Thus the measurement and management of banks’ capital is indissolubly linked to the successful management of their liquidity, a link graphically illustrated by events during the current financial crisis.