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Thursday, November 20, 2014

Basel III Increases Compliance Cost, Modestly Impacts Lending

GAO found that, although U.S. Basel III capital requirements may increase compliance costs, they likely will have a modest impact on lending activity as most banks may not need to raise additional capital to meet the minimum requirements.

Most banks and bank holding companies currently meet the new minimum capital ratios and capital conservation buffer at the fully phased-in levels required by 2019. Less than 10% of the BHCs collectively would need to raise less than $5 billion in total additional capital to cover the capital shortfall. They study found that banks with the shortfall tended to have less than $1 billion in assets.

According to the GAO’s analysis, higher regulatory capital requirements will have a modest effect on the cost and availability of credit. Furthermore, the analysis indicates that raising the additional capital would lead to a modest decline in lending and a modest increase in loan rates.

Eight community banks interviewed said they do not anticipate any difficulties meeting the capital requirements, but they expect to incur additional compliance costs. The 10 global systemically important banks said they have been incurring significant costs to comply with the new requirements, but three said that U.S. minimum capital ratios for Basel III tend not to be the binding capital constraint. Most of these bank officials said they expect the requirements to improve the resilience of the banking system.

The GAO also examined how implementation of Basel III by different countries and other jurisdictions may affect U.S. banking organizations’ international competitiveness. The study found that, although difference in the implementation of the capital standards have arisen, their competitive effect on internationally active banks is unclear.

Read the GAO report.

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