UPDATE 1-Bank of Canada sees new bank rules boosting economy

* Bank of Canada sees long-term economic benefits

* Economic benefits far outweigh costs, bank judges (Adds details, background)

By Louise Egan

OTTAWA, Aug 18 (Reuters) - Canada's economy would benefit significantly from tougher new global banking rules, primarily because there would be less fallout from foreign financial crises, the Bank of Canada said on Wednesday.

The central bank's assessment of the economic impact of proposed new bank capital and liquidity rules, known as Basel III, echoes two international studies that say the estimated costs of the changes are smaller than private banks have argued. Basel III is the cornerstone of the global effort to prevent future banking and financial crises.

"This study finds that Canada should benefit significantly from the anticipated reduction in the likelihood of future financial crises as a result of strengthened capital and liquidity requirements," the bank said in its report.

The new standards have not yet been set, with G20 countries expected to agree to them in November.

But by way of example, the bank said if bank capital ratios increase by 2 percentage points, gross domestic product would likely decrease by an average of 0.3 percent per year in the long run as higher financing costs for consumers and businesses dampen consumption and investment.

However, the economic gain arising from that same capital increase -- due to the decreased likelihood of financial meltdowns -- would be a 1.1 percent annual increase in the size of GDP.

Therefore, the average net benefit to GDP in the long run is estimated at 0.8 percent, rising to 0.9 percent if capital ratios are increased by 4 percent or 6 percent.

"For Canada, three-quarters of the benefits arise from the decrease in the likelihood of foreign financial crises, while the remainder represents the gains to be achieved from the reduced probability of a domestic financial crisis," the bank said.

It acknowledged that its estimates were highly uncertain as central bankers still have little experience calculating the impact of financial sector performance on the economy.

The Canadian economy would benefit even when conservative benefit assumptions are combined with the most extreme cost estimates, the bank said.

The cumulative benefit to the economy would amount to C$200 billion, or 13 percent of GDP, when calculated on a present-value basis.

Banks have lobbied regulators for longer transition periods for implementing the new rules, arguing that it would soften the impact on lending and help the recovery process. The maximum impact on the Canadian economy of a two-year phase-in period would be a GDP that is 0.5 percent smaller than it would otherwise be, the Bank of Canada said.

Canadian banks survived the financial crisis without the huge government bailouts needed in the United States and Europe and have generally welcomed the proposed new rules.

However, the global meltdown still pushed Canada into a mild recession and fiscal deficit. Policymakers have committed to beefing up banking standards.

The full scope of Basel III won't be clear until later this year when regulators agree a new figure for a bank's Tier 1 capital requirement -- a key measure of stability and currently set at 4 percent -- and how long the sector has to phase out lower quality capital.

The Group of 20 leading countries, which is spearheading the reform, is set to endorse the complete Basel III package at November summit in Korea, with implementation from the end of 2012. (Reporting by Louise Egan and Howaida Sorour; editing by Peter Galloway)