Assessing the impact of Basel III: Evidence from macroeconomic models: literature review and simulations

The first part of this report reviews the different channels of transmission of financial shocks (including regulatory changes) highlighted in the literature in the past 15 years. While a very large number of new models have been made available since the Committee's assessment of the long-term economic impact of stronger capital and liquidity requirements, standard models still concentrate mostly on capital requirements and more rarely on liquidity. Alternative models consider other policies (unconventional monetary policies, etc) as well as new, highly relevant challenges like interactions with the shadow banking system. However, the latter models are not yet sufficiently operational to allow an empirical assessment of the impact of the regulatory changes.

The second part of the report provides a simulation of regulatory scenarios replicating the implementation of Basel III reforms, using "off-the-shelf" macro-finance models. These simulations provide novel estimates of the impacts of Basel III. In a nutshell, whenever the costs and benefits of regulation are introduced in the model, the effects of Basel III are positive on GDP. However, in the transition phase the positive effects may be associated by a temporary slowdown accommodated by monetary policy.