Basel says new bank rules growth impact "modest"

VIENNA (Reuters) - New bank rules will cut global output by a small fraction, a "modest" price to pay for greater stability, the Basel Committee on Banking Supervision said, dismissing lenders' warnings that they may curb growth severely.

The new "Basel III" rules for banks' capital and liquidity will tighten lending and reduce investment during a transition period, but to a much lower degree than forecast by banks, Basel and the Financial Stability Board (FSB) said on Wednesday.

"Macroeconomic costs of implementing stronger standards are manageable, ... while the longer-term benefits to financial stability and more stable economic growth are substantial," FSB Chairman Mario Draghi said in the statement.

Assuming the rules are phased in over four years and banks' capital levels rise by 2 percentage points, output would on average decline by 0.38 percent compared to a baseline scenario, according to an analysis by the FSB, a body tasked by the G20 to coordinate a string of market reforms including Basel III.

This is only an eighth of the 3.1 percent output loss over five years due to Basel III and other measures which bank lobby group The Institute of International Finance (IIF) has predicted for the United States, the euro zone and Japan.

The Bank of Canada said the new rules would benefit Canada's economy significantly from reduced likelihood of fallout from foreign financial crises. It saw gains even with conservative benefit assumptions and the most extreme cost estimates.

Once banks have completed the switch, the new rules will help avoid or at least moderate the boom-and-bust cycles which first pump too much capital into the wrong places and then cause huge output losses when the bubble bursts, Basel said.

Eliminating savage downturns such as that seen after the 2008 financial crisis could in the long-term add as much as 1.8 percent economic growth per year, Basel said in a second study trying to gauge the long-term benefits of the new rules.

"Economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Basel Chairman Nout Wellink.

"These benefits result not only from a stronger banking system in the long run, but also from greater confidence in the stability of the financial system as soon as implementation starts," he said.

The Basel Committee of global banking supervisors published a draft Basel III reform last December that would force banks to hold more and better quality capital to withstand future shocks without taxpayer help again.

It eased some of the original proposals and said banks would have more time to comply in a revision last month that addressed some concerns banks have raised.

The G20, which is spearheading the reform, is set to endorse the complete Basel III package in November with implementation starting from the end of 2012.

LONGER PHASE-IN EASES HIT

The Basel and FSB reports corroborate the view that a longer phase-in of the new rules is needed to avoid scuppering the fledgling recovery of the world economy, especially as major economies enter a period of budget austerity.

"A longer transition period could substantially mitigate the impact, allowing banks additional time to adapt by retaining earnings, issuing equity, shifting liability composition and the like," the FSB said in its assessment of the transition.

Basel and the FSB said the banks' assessment of the impact of the new rules was over-dramatic because it assumed banks will return to pre-crisis levels for return on equity, and because it compared the impact to pre-crisis debt-bubble practices that were unlikely to return even without new regulation.

A crucial question yet to be answered on Basel III is what minimum level of capital banks will be required to hold in the new system, and what this new regulatory minimum will mean for the -- usually higher -- level markets expect.

Another impact study that has not been published yet by Basel will calculate where banks' current capital levels are if the new, stricter rules are applied, and what this means for the new level and for capital-raising needs.

Regulatory sources have told Reuters that Basel is likely to require banks to hold 6 to 8 percent of core Tier 1 capital including a "capital conservation buffer," and in addition to have another 2 percent "countercyclical buffer.

While countries are broadly in agreement on the need for tougher guidelines but divided on the degree. Britain and the United States have argued for a higher core Tier 1 ratio while Japan, France and Germany have pushed for less stringent rules.

The IIF has said banks in the three key economic areas would need to raise $700 billion of common equity and issue $5.4 trillion of long-term wholesale debt in the next five years to meet the expected new capital and liquidity requirements.

(Reporting by Boris Groendahl; editing by Stephen Nisbet)