Basel, FSB say bank buffer worth small economic hit

LONDON Mon Oct 10, 2011 3:00pm EDT

LONDON Oct 10 (Reuters) - The benefits for taxpayers of a safer financial system will far outweigh the temporary hit to economic growth of imposing an extra capital buffer on top banks, global regulators said on Monday.

The Basel Committee on Banking Supervision and the Financial Stability Board said their joint study group estimates that a one percentage point buffer on the top 30 banks over eight years would cut economic growth by less than 0.01 percent a year during the phase-in period.

"The Macroeconomic Assessment Group concludes that the transition to stronger capital standards on global systemically important banks is likely to have at most a modest impact on aggregate output, while the benefits from reducing the risk of damaging financial crises will be substantial," the two bodies said in a statement.

Both have approved the bank capital surcharge plan that leaders of the world's top 20 economies (G20) are set to endorse in November.

A surcharge of 1-2.5 percent -- the amount depending on five factors like complexity and international reach -- will be introduced from 2016 over three years with banks such as JPMorgan Chase , HSBC , Barclays and Deutsche Bank almost certainly included.

The surcharge comes on top of a minimum of 7 percent capital buffers all banks must hold under the global Basel III accord being phased in from 2013.

The aim is to avoid taxpayers having to bail out banks again in the next crisis. It is part of a wider effort to tackle so-called "too big to fail" lenders by ending market and investor assumptions that governments would not allow them to collapse.

JPMorgan Chase Chief Executive Jamie Dimon has described the surcharge as anti-American and has clashed with Bank of Canada Governor Mark Carney, tipped to head the FSB from November.

Banking industry bodies warn that piling capital requirements on lenders will crimp their ability to aid economic growth, but regulators say banks fail to include the benefits of tougher standards in their calculations.

The Basel Committee and FSB -- which has been tasked by the G20 to coordinate the world's core regulatory responses to the financial crisis -- said the permanent benefits of the surcharge arise from the reduced likelihood of systemic crises that can have long-lasting effects on the economy.

The two bodies estimated that the Basel III proposal combined with the capital surcharge "contribute a permanent annual benefit of up to 2.5 percent of GDP -- many times the costs of the reforms in terms of temporarily slower annual growth."

The Basel III rules and surcharge combined will lower economic growth by an estimated 0.34 percent at the point of peak impact, the regulators said.

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