## _wp12233 ## Source details **Canonical URL:** [_wp12233](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12233.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12233.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12233.pdf.json) --- ### Executive summary — purpose, scope, and context - Purpose: - Assesses the overall impact on credit of global financial regulatory initiatives in Europe, Japan, and the United States. - Focuses on long-term outcomes rather than transitional costs; does not measure the economic benefits of reforms. - Concentrates principally on effects of regulatory changes on banks and their lending; also considers where possible securities holdings by banks and securities markets. - Context: - Stronger capital and liquidity requirements under Basel III have economic costs during good years, analogous to insurance payments. - Serious disagreement about cost magnitudes: IIF estimated a reduction in advanced-economy output of approximately 3 percent during 2011–15; official estimates suggest a much smaller drag. - Major empirical findings (base case long-run increases in lending rates): - Europe: 18 bps - Japan: 8 bps - United States: 28 bps - Broad conclusion: - Relatively small long-run effects on lending rates in the base case; banks have substantial ability to adapt; if reforms are economically sound, they should be pursued, otherwise reassessed. ### Methodology overview and key assumptions - Methods combined: academic theory, empirical analyses (industry and official), and financial disclosures by major financial firms. - Credit-pricing model components charged by credit providers: - cost of allocated capital; - cost of other funding; - credit losses; - administrative costs; - certain miscellaneous factors. - Baseline choice: - End-2010 figures on capital and liquidity in U.S., Japan, and Europe used as baseline (post-crisis market-driven margins included). - End-2010 Basel III equivalent tangible common equity ratios: about 3 percent in Europe and Japan and a bit over 5 percent in the United States (text description). - Five reform categories quantitatively analyzed: - capital requirements, liquidity requirements, derivatives regulations, securitization regulations, and taxes and fees. - Eight categories of bank responses modeled: absorb costs via lower shareholder returns, reduce funding costs, reduce expenses, decrease expected credit losses, technical/structural measures, ration credit, raise credit prices, restructure businesses. - Key numeric modeling assumptions (preserved): - Required return on equity (ROE) base-case: 12.00 (Europe), 7.00 (Japan), 12.00 (U.S.). - Base cost of other funding: 2.00 (Europe), 1.25 (Japan), 2.00 (U.S.). - Tax rate (in percent): 30.00 (all regions). - Assumed minimum capital-to-RWA ratio in equilibrium: 10.00 (all regions). - Assumed 50 percent pass-through (Modigliani-Miller offset) as working assumption unless otherwise noted. ### Quantitative results — capital requirements - Basel III changes (summary): - Minimum common equity capital ratio raised in practice from about 2 percent to 7 percent (includes 2.5 percent conservation buffer). - Minimum quality of capital tightened; many instruments dropped from core capital. - SIFI surcharges: 0.5 to 2.5 percentage points above other banks; can rise to 3.5 percentage points in certain cases. - Pro-forma CET1 impacts (selected preserved table figures, end-2010): - Initial Basel I/II common equity Tier 1 capital ratio 1/: Europe 11.0, U.S. 9.2, Japan 9.4. - RWA increase arising from Basel II.5 and III 1/: Europe -3.9, U.S. -1.7, Japan -0.7. - Pro forma CET1 after RWA increase 1/: Europe 7.1, U.S. 7.7, Japan 8.6. - Deductions arising from Basel III 1/: Europe -1.2, U.S. -1.1, Japan -0.6. - Pro forma CET1 after RWA increase and capital deductions (without mitigation) 1/: Europe 6.0, U.S. 6.7, Japan 7.9. - Mitigation 1/: Europe 0.8, U.S. 0.7, Japan 0.3. - Basel III pro forma CET1 after RWA increase, mitigation, and capital deductions 1/: Europe 6.7, U.S. 7.3, Japan 8.3. - Regional sample averages (end-2010, preserved): - Initial Basel I/II CET1 capital ratio 1/: Europe 9.7, U.S. 9.2, Japan 9.7. - Pro forma CET1 after RWA increase and capital deductions (without mitigation) 1/: Europe 7.1, U.S. 6.6, Japan 6.7. - Mitigation 1/: Europe 1.0, U.S. N.A., Japan 0.3. - Basel III pro forma CET1 after RWA increase, mitigation, and capital deductions 1/: Europe 8.0, U.S. 6.6, Japan 7.0. - Memorandum: Number of banks: Europe 38, U.S. 21, Japan 6; Total assets (in US$ billion) 3/: Europe 33,961, U.S. 6,038, Japan 11,522. - Stand-alone effect of higher capital on pre-tax loan interest rate (preserved table figures): - Europe: 0.19 - Japan: 0.13 - U.S.: 0.40 - Assumed offset from reduction in return required by market: - Europe: -0.09 - Japan: -0.07 - U.S.: -0.20 - Net stand-alone effect on pre-tax loan interest rate: - Europe: 0.09 - Japan: 0.07 - U.S.: 0.20 - Necessary increase in capital-to-total assets ratio (preserved): - Europe: 1.24 - Japan: 1.54 - U.S.: 2.65 - Memorandum items (preserved): Total assets (in US$ billion): 33,961 (Europe), 6,038 (Japan), 11,522 (U.S.); Total RWA after Basel II.5 and III (in US$ billion): 14,597 (Europe), 2,713 (Japan), 9,233 (U.S.). ### Quantitative results — liquidity requirements (LCR and NSFR) - LCR and NSFR timelines and targets: - LCR: 30-day stress, required to exceed 100 percent upon full implementation; supervisors started monitoring in 2011; minimum standard starting in 2015. - NSFR: one-year maturity structure; supervisors started monitoring in 2011; binding requirement in 2017. - Estimated pro-forma liquidity gaps (preserved table summary): - LCR (average, percent): Europe 76, Japan 121, U.S. N.A. - Additional liquid assets needed for a 100% LCR (in US$ billion): Europe 1,326, Japan 537, U.S. 0 (U.S. BCBS-adjusted sample); alternative U.S. approach yields US$695 billion. - NSFR (average, percent): Europe 89, Japan 87, U.S. N.A. - Additional long-term funding needed for a 100% NSFR (in US$ billion): Europe 1,703, Japan 554, U.S. 1,000 (Table 8 used US$1,000; text notes US$622 billion and an upper-bound US$1,000 billion). - Table 9 key preserved figures (effects on lending rates, selected): - Total net effect of LCR and NSFR (in percent): Europe 0.14, Japan 0.11, U.S. 0.21. - Liquid assets needed for a 100% LCR (in US$ billion): 1,434.66 (Europe), 54.21 (Japan), 700.00 (U.S.). - Net liquid assets needed (in US$ billion): 1,306.43 (Europe), 26.28 (Japan), 607.80 (U.S.). - Increase in pre-tax funding cost or reduction in investment income (in percent): 2.00 (Europe), 1.25 (Japan), 2.00 (U.S.). - Reduction in pre-tax interest margin (in US$ billion) from LCR: 26.13 (Europe), 0.33 (Japan), 12.16 (U.S.). - Funding needed for a 100% NSFR (in US$ billion): 1,843.29 (Europe), 563.26 (Japan), 1,000.00 (U.S.). - Net funding needed after capital offset (in US$ billion): 1,715.06 (Europe), 535.33 (Japan), 907.80 (U.S.). - Reduction in pre-tax interest margin (in US$ billion) from NSFR: 34.30 (Europe), 6.69 (Japan), 18.16 (U.S.). - Memorandum items: Total assets (in US$ billion): 33,961 (Europe), 6,038 (Japan), 11,522 (U.S.); Tax rate (in percent): 30.00 (all regions). - Caveats: - Major uncertainty in liquidity gap sizes; cost estimates for altering maturities imprecise; overlap between LCR and NSFR uncertain; costs assumed spread evenly across the loan book may overstate loan impact. ### Quantitative results — derivatives, securitization, taxes/fees - Derivatives reforms (preserved estimates and assumptions): - Intermediate estimate of initial margin required by CCPs for swaps: US$0.7 trillion; grossed up to ~US$1.1 trillion for all swaps. - Existing collateral covers about 44 percent of swap exposures; estimated net new collateral required: ~US$0.6 trillion. - Assumed net cost of funding additional collateral: 200 bps. - First-order effect of higher collateral: ~US$12 billion a year (US$0.6 trillion times 2 percent). - Translating to lending rates: roughly 3 bps on total size of assets held by banks in Europe and the United States (illustrative). - Net impact on lending rates: small relative to capital and liquidity reforms. - Securitization reforms: - “Skin in the game” commonly 5 percent; increased disclosure, underwriting standards, oversight of rating agencies, higher capital charges. - Insufficient data to produce reliable quantitative cost estimates; likely magnitude comparable to derivatives reforms and substantially smaller than capital and liquidity reforms. - Taxes and fees (selected preserved figures): - Total estimated effect on net income (in US$ billion): 14.70 (Europe), 0.00 (Japan), 3.38 (U.S.). - Effect on pre-tax income (in US$ billion): 20.99 (Europe), 0.00 (Japan), 4.83 (U.S.). - Cost per dollar of assets (in percent): 0.06 (Europe), 0.00 (Japan), 0.04 (U.S.). - Examples noted: U.S. Administration proposed a Financial Crisis Responsibility Fee originally pegged at about US$10 billion a year and subsequently reduced to about US$3 billion a year (source notes little chance of passage through Congress). ### Integrated effects, mitigation, and net lending-rate impacts - Interaction logic: - Interactions between capital and liquidity requirements typically reduce net cost relative to simple summation (e.g., higher capital can lower liquidity needs; safer liquid assets can lower capital RWAs). - Aggregation explicitly models capital–liquidity interactions and other cross-effects. - Bank mitigating actions included and quantified where possible: - Expense reductions assumed: Europe 5 percent, Japan 5 percent, U.S. 10 percent (with U.S. expense cuts accounting for 15 bps in Table 14). - Additional non-price adjustments assumed: 5 bps across regions. - Investor required return on equity assumed to decline with improved safety (partial pass-through; working assumption roughly 50 percent). - Box 1 — quantified cumulative impact (Table 14 summary, in basis points; preserved figures): - Total gross effects: Europe 31, Japan 18, U.S. 48. - Expense cuts: Europe 8, Japan 8, U.S. 15. - Other aggregate adjustments: Europe 5, Japan 3, U.S. 5. - Total adjustments: Europe 13, Japan 10, U.S. 20. - Net cost (post-adjustments): Europe 18, Japan 8, U.S. 28. - Base-case long-run lending-rate increases reported elsewhere in document (close/consistent figures): - Europe: 17 bps (Box 1 long-run estimate) and 18 bps (Executive Summary base case headline). - Japan: 8 bps. - United States: 26 bps (Box 1) and 28 bps (Executive Summary headline). - Sensitivity: - Reasonable changes in assumptions do not alter qualitative conclusions; even under extreme parameter assumptions, changes in lending rates remain below 100 bps. - Specific sensitivities noted: net effect of capital increases in the United States changes by 2 bps for each additional point in required ROE. ### Restructuring strategies and economy-wide implications - Bank responses (qualitative and selected quantitative assumptions): - Shifts in business mix, operational transformations, cultural transformations, mergers and acquisitions. - Assumed expense reductions (eventual): full 10 percent of expenses in the United States; 5 percent in Europe and Japan. - Additional 5 bps of expense cuts or revenue improvements assumed from non-price adjustments. - Credit availability: - Price increases in the base-case ranges are unlikely to cause broad-based reductions in credit availability; some pockets of credit rationing possible. - If non-bank providers substitute, bank credit shrinkage may be offset by rising non-bank credit. - Sectoral effects: - Capital and liquidity reforms: major impact on banks, confer competitive advantages on non-banks. - Derivatives and securitization reforms: smaller aggregate costs but important distributional effects (large dealers vs. small banks and end users). ### Limitations, caveats, and research gaps - Not modeled or limited aspects: - Transition costs not examined in depth. - A number of regulatory reforms are not modeled; securitization reform quantification infeasible with available data. - Many estimates required judgment; the modeling approach is relatively simple. - Regulatory implementation assumed appropriate; poor implementation could add costs. - Analysis focuses on long-run outcomes; does not account for current stressed transition period (especially in Europe). - Research gaps identified: - Transitional effects and short-run versus long-run costs. - Regulatory arbitrage and role of less-regulated credit providers (shadow banking). - Effects on other regions and breakdown by borrower/lender types. - Quantitative estimates for additional categories of reform and translation of credit impacts into GDP effects. *Source: _wp12233* ### Executive Summary ...................................................................................................... ### _wp12233 - Executive Summary ...................................................................................................... ### Purpose and scope - Assesses the overall impact on credit of global financial regulatory initiatives in Europe, Japan, and the United States. - Focuses on long-term outcomes rather than transitional costs; does not measure the economic benefits of reforms. - Concentrates principally on effects of regulatory changes on banks and their lending; also considers where possible securities holdings by banks and securities markets. ### Context and motivation - Reforming regulation of financial institutions and markets is critically important and should provide large benefits to society. - The recent financial crisis underlined the huge economic costs produced by recessions associated with severe financial crises. - Stronger capital and liquidity requirements under Basel III have economic costs during good years, analogous to insurance payments. - There is serious disagreement about cost magnitudes: - The Institute of International Finance (IIF) estimated the proposed reforms will reduce economic output in the advanced economies by approximately 3 percent during 2011–15. - Official estimates suggest a much smaller drag. ### Methodology overview - Combines academic theory, empirical analyses from industry and official sources, and financial disclosures by major financial firms to reach cost estimates. - Uses a simple credit-pricing model where credit providers charge for: - the cost of allocated capital; - the cost of other funding; - credit losses; - administrative costs; - certain miscellaneous factors. - Establishes initial values for these variables, determines changes under regulatory reform, and evaluates changes in credit pricing and other variables needed to rebalance the equation. - Provides stand-alone cost estimates for: - capital and liquidity requirements; - derivatives reforms; - higher taxes and fees. - Securitization reform was considered but proved impossible to quantify. - Develops an integrated cost estimate that examines interactions and includes likely mitigating actions by financial institutions. ### Major empirical findings - Long-run increases in lending rates in the base case: - Europe: 18 bps - Japan: 8 bps - United States: 28 bps - Results are broadly in line with previous official studies (BIS and OECD), but markedly lower than the IIF estimates. - Three methodological extensions that reduce net costs relative to some official studies: 1. Baselines here assume a greater hike in safety margins due to market forces (less attributed to regulation). 2. Banks are assumed to take additional cost-reduction and other measures, accounting for: - 13 bps of cost reduction in Europe, - 10 bps of cost reduction in Japan, - 20 bps of cost reduction in the United States. 3. Equity investors are assumed to reduce their required rate of return on bank equity as a result of safety improvements; debt investors follow suit to a much lesser extent. - Sensitivity analysis indicates reasonable changes in assumptions do not alter conclusions dramatically. ### Interpretation relative to other studies - Similar first-order effects to official BIS assessments of Basel III and to OECD (Slovik and Cournède (2010)), partially due to similar methodologies. - Cost estimates here are markedly lower than those of the IIF. - Differences arise primarily from baseline assumptions, assumed bank mitigation actions, and assumed investor reaction to improved safety. ### Limitations and caveats - Transition costs are not examined. - A number of regulatory reforms are not modeled. - Many estimates required judgment; the modeling approach is relatively simple. - Regulatory implementation is assumed to be appropriate (not adding unnecessary costs). - Analysis is based on the long-run outcome; it does not account for the current troubled transition period, where raising capital or liquidity can be particularly difficult and expensive. - Under current stressed conditions (noted for Europe), transitional effects could magnify credit supply reductions and lending rate increases. - Further research is needed to translate credit impacts into effects on economic output. ### Policy-relevant implications and conclusions - The relatively small long-run effects on lending rates found suggest that the benefits of regulatory reforms would likely outweigh the costs in the long run. - Banks have substantial ability to adapt over time to reforms without radical actions harming the wider economy. - If reforms are economically sound, they should be pursued to increase safety and reduce rule uncertainty that creates inefficiencies and impedes long-term planning. - If the true price of reforms is too high, reforms should be reassessed to improve the cost-benefit ratio. *Source: _wp12233 - Executive Summary* ### INTRODUCTION ### INTRODUCTION ### Importance and trade-offs of financial reform - Reforming the regulation of financial institutions and markets is critically important and should provide large benefits to society. - The recent financial crisis underlined the huge economic cost that comes with recessions associated with severe financial crises. - Policymakers, including Group of 20 leaders, placed a high priority on reforming the financial system. - Adding safety margins in the financial system comes at a price: - Some reforms (for example, measures to increase transparency) may reduce the system’s running costs as safety increases efficiency. - More frequently, greater security has a cost during non-crisis years when wider safety margins have little short-term benefit. - The substantially stronger capital and liquidity requirements under Basel III have economic costs during the good years analogous to insurance payments intended to reduce the probability, severity, and economic damage of future crises. ### Disagreement over the magnitude of costs - There is serious disagreement about how much additional safety margins will cost. - IIF (2011) projected that the proposed reforms will wipe away approximately 3 percent of the economic output of the advanced economies during 2011–15. - Official estimates, particularly from the BIS Macroeconomic Assessment Group (MAG), suggest a reduction in GDP in those countries that is much lower. ### Purpose, scope, and focus of the study - Aim: Assess the overall impact on credit of the financial regulatory initiatives in Europe, Japan, and the United States. - Structure: - Review relevant academic theory. - Examine three principal data sources: official sector analyses of economic impact of reforms; disclosures by financial institutions of pro-forma impact of Basel III rules; reports by equity and debt analysts, industry associations, and consulting companies. - Focus: - Long-term outcomes rather than transitional costs; does not attempt to measure economic benefits. - Separate estimates for Europe, Japan, and the United States due to significant differences in economic and financial systems. - Detailed analysis focused on banks (cornerstone of the financial system) rather than the rest of the financial system. - Primary focus on the loan business because of its high importance in overall credit provision and greater data availability. - Excludes reforms not specifically spurred by the financial crisis (example noted: Solvency II is excluded). ### Baseline, transitional effects, and mitigating dynamics - Measuring costs requires careful consideration of the baseline: regulatory minima may not be the binding constraint because institutions often hold margins above minima for safety and market/rating pressures. - The crisis changed perceptions of risk; appropriate buffers above regulatory minima have surely changed. - Analysis is based on long-run outcomes, not current transitional pressures. - If capital or liquidity is difficult/very expensive to raise during transition (as currently in Europe), a reduction in credit supply and magnified increases in lending rates are expected. - Deleveraging is occurring at European banks in response to financial market, economic, regulatory, and political factors; it is impossible to tell whether this is due to anticipation of Basel III. - Over time, banks can find necessary capital and liquidity to provide credit if pricing is appropriate; capital and liquidity will flow if credit prices rise beyond fundamentals. - The study assumes regulations are implemented appropriately (avoiding unnecessary costs) and does not generally incorporate regulatory arbitrage, shifts to shadow banking, or gaming of the system in quantitative estimates, though these could decrease the measured cost of credit provision and reduce reforms’ effectiveness. ### Methodology and quantitative approach - Five categories of reform were initially selected for detailed quantitative analysis based on qualitative assessment: they are the most important and amenable to quantitative estimates. - For each category: - Cost estimates are presented based on external analyses supplemented by authors’ calculations. - Cost estimates are translated into a common framework of changes in the average cost of credit for borrowers. - Securitization reform proved impossible to quantify with available information. - An overall integrated cost estimate considers interactions among categories and mitigating actions by financial institutions (for example, expense cuts to offset price increases). ### Literature review: empirical and theoretical findings - Theoretical models provide broad lessons about optimal capital regulation but are too simplified for specifics. - Empirical studies of historical changes in capital requirements face identification problems controlling for contemporaneous factors. - Far fewer academic analyses exist on liquidity requirements; virtually no studies exist on cost effects of other major regulatory changes (except taxation/fees). - Equity and credit analysts and international management consulting firms have produced many practical analyses; these incorporate institution guidance and likely management responses, and suggest a considerable range of reactions beyond simply raising prices. - Official bodies have published cost-benefit analyses (notably on Basel III capital and liquidity reforms) that report low macroeconomic effects, finding benefits from higher financial stability outweighing output costs. ### Comparative findings: comprehensive studies and differences - IIF (2011) provides a comprehensive analysis finding far larger costs than other studies: - Predicts the price of credit in the United States will average almost 5 percentage points higher on average over the period 2011–15 as a result of regulatory changes alone (across all forms of loans, including mortgages and shorter-term credit). - Estimates GDP in major economies would be about 3 percent smaller in 2015 than without the effects of comprehensive financial reforms. - Differences between this study and IIF (2011) highlighted: - This study focuses on long-term effects while IIF emphasizes transition effects. - Four key areas of divergence: - IIF baseline corresponds more to pre-crisis safety margins rather than post-crisis market-driven adjustments, potentially attributing market-driven corrections to regulation. - IIF assumes investor required returns are heavily influenced by the volume of securities issued; the assumed magnitude of this effect may be too large. - There is greater scope for cost-cutting by banks than IIF assumes. - (A fourth area is implied as technical choices and modeling differences across studies.) - Slovik and Cournède (2011) (OECD) estimate effects well below IIF: - Use a simple banking model where bank funding costs rise by the difference between starting cost of capital and starting cost of debt multiplied by new capital required, directly passed through as higher loan rates. - Their model excludes decreases in investor required returns due to a safer banking system and assumes banks maintain the same discretionary buffers above regulatory minimums. - Despite assumptions that tend to overstate lending-rate impacts, they still find much smaller spread increases than IIF and translate those into smaller expected declines in economic growth. ### Research gaps and future work suggested - Topics for further research include: - Analysis of transitional effects. - Potential impacts of regulatory arbitrage and shifts in role of less-regulated credit providers. - Effects of insurance regulations. - Impact on other regions of the world. - Further breakdown of effects on different types of borrowers, lenders, and transactions. - Inclusion of more categories of reform than those studied in detail here. *Source: INTRODUCTION (from _wp12233 - INTRODUCTION)* ### 0.75 percent smaller after five years, rather than 3 percent smaller in the IIF’s estimate. ### _wp12233 - 0.75 percent smaller after five years, rather than 3 percent smaller in the IIF’s estimate. ### Quantitative estimates of Basel III impacts - BCBS (2010) estimated that the Basel III capital and liquidity changes would reduce the steady-state level of economic activity by 0.6 percent in total, or 0.08 percent annually, if spread over the eight-year transition period. - Key BCBS (2010) assumptions (as stated in the source): - Full pass-through of capital and funding costs to loan rates. - No reduction in operating expenses. - No increase in non-interest sources of income. - No credit rationing. - No changes in the cost of capital and debt arising from higher capital and liquidity ratios. - A possible reduction in the liquidity requirements arising from compliance with the capital requirements. - 15 percent return-on-equity (ROE). - 100 bps yield difference between illiquid and liquid assets and long and short liabilities. - MAG (2010) comparison note: MAG (2010) estimated loan spreads that are slightly higher over a period of 35 quarters than the ones estimated by BCBS (2010) and slightly lower over a period of 48 quarters. - BIS estimate note: BIS estimates an increase in credit spread of 13 bps for each one point increase in the ratio of Tangible Common Equity to Risk-Weighted Assets, and for the table a 4 point change in the ratio is assumed for broad consistency with IIF and OECD figures. - High-level takeaways: - Previous studies differ greatly in their cost estimates (the source notes major differences across studies). - It is likely that capital and liquidity changes account for a significant majority of the costs among the regulatory changes considered. ### Qualitative assessment and ranking approach - The study groups reforms into larger categories and assesses them by relative importance on a qualitative basis, separately for each geographical region and by major classes of financial institutions and markets. - The qualitative assessment uses a simple scale running from +10 to -10: - +10 represents a category of reform likely to create a major increase in costs for the relevant type of financial institution. - Negative numbers indicate institutions would likely benefit from a decrease in costs, or from an increase in revenues that more than covers additional costs. - The authors caution that these qualitative assessments are rough, subjective, and intended only to focus further quantitative work; exact rankings are of no significance beyond that limited purpose. - It is assumed in the qualitative analysis that the implementation of regulations will be appropriate; execution problems could raise economic costs. ### Impact on U.S. financial institutions — major reform categories and rationales (summary of Table 3 rationales) - Higher capital requirements - Required equity capital for banking activities will increase several-fold in the United States once Basel III is implemented. - Expected result: increase costs substantially for U.S. banks across the board. - Non-banks generally are not facing appreciably higher capital requirements and therefore may gain competitive advantage; some credit activity may move to capital markets. - Higher liquidity requirements - Basel III rules would force U.S. banks to shift asset-liability management toward shorter asset maturities and longer liability maturities, both expensive adjustments. - Commercial banking (especially smaller banks) is likely to be less affected due to access to stable deposits; investment banking would be more heavily affected. - Non-bank financial institutions should benefit from movement of business away from banks. - Tightening of derivatives regulation - Dodd-Frank pushes standardized derivatives toward exchange-trading and central clearing; customized derivatives face higher capital charges and more collateral requirements. - Expected effects: bank costs increase; some high-margin revenue shifts to low-margin standardized forms; some business shifts to non-banks and capital markets. - Accounting changes - Changes in GAAP will make U.S. financial institutions look less attractive and require more capital (regulatory accounting often follows GAAP). - Harder to move transactions off-balance sheet; will hit most financial institutions, with somewhat less effect on insurers and more on other non-bank financials. - Changes to securitization regulation - Aim: increase transparency and align incentives for securitization originators. - Likely result: securitizations harder and more costly to do; banks modestly affected; some non-bank financials more affected due to prior heavy use of securitizations. - Enhanced consumer protection regulation - Consumer Financial Protection Bureau (CFPB) expected to raise compliance and potentially reduce revenue potential of some bank products; commercial banks likely considerably affected over time. - Investment banks less affected; many non-bank financial institutions may face substantial new federal regulation. - Expansion of the regulatory perimeter - Bringing more entities inside the perimeter increases costs and limitations for them, and can create a relative benefit for banks by leveling the playing field. - Higher taxes or fees facing financial institutions - Deposit insurance fees in the United States have increased; fee formula changes shift burden toward larger banks. - U.S. Administration proposed a Financial Crisis Responsibility Fee originally pegged at about US$10 billion a year and subsequently reduced to about US$3 billion a year; the source notes little chance of passage through Congress. - Changes in crisis management and resolution regimes - Dodd-Frank and FSB efforts intend to make it easier to deal with troubled institutions and reduce government support for bondholders/counterparties. - Expected effects: added administrative expenses and operational limitations for large U.S. banks and possible higher funding costs due to reduced likelihood of government aid; modest competitive advantage for other credit providers. - Tougher regulation of credit rating agencies - Greater SEC oversight, more transparency, and higher legal liabilities; modest upward pressure on the cost and effort to obtain ratings. - Structural changes to banks and activity limits - Volcker Rule and related measures will limit proprietary trading and rehouse derivatives business; effects are on the banking periphery and may modestly benefit smaller banks and capital markets. - Changes in regulation of compensation and governance - Regulations are relatively minor and may work in favor of banks by discouraging unreasonable risk-taking and holding down employee compensation; unlikely to spur a talent exodus. ### Representative numeric entries from the qualitative impact matrix (as presented) - Scale description: +10 to -10. - Examples of entries (matrix rows as presented in the source): - Higher capital requirements: 10 10 10 10 -7 -8 -10 - Higher liquidity requirements: 7 4 10 8 -5 -8 -10 - Tightening of derivatives regulation: 8 3 10 8 -2 -3 -5 - Accounting changes: 3 3 3 3 1 6 3 - Changes to securitization regulation: 2 3 2 2 1 4 3 - Enhanced consumer protection regulation: 5 5 2 3 1 7 2 - Expansion of the regulatory perimeter: -3 -3 -3 -1 -2 0 7 2 - Higher taxes or fees facing financial institutions: 3 2 3 3 1 3 -1 - Changes in crisis management and resolution regimes: 4 0 3 3 -1 -1 -2 - Tougher regulation of credit rating agencies: 1 1 1 1 1 2 2 - Structural changes to banks and activity limits: 2 -1 3 2 0 -1 -2 - Changes in regulation of compensation and governance: 0 0 0 0 0 0 0 (Note: the matrix rows above are presented verbatim from the source material to reflect the qualitative scoring across categories and institution types.) ### Overall conclusions and compliance costs - The reforms fall into three broad groupings: - Major impact: Capital and liquidity requirements — these should have a major impact on costs and profitability for banks and confer competitive advantages on non-banks. - Modest impact: Several categories that are significant but do not rise to the level of capital and liquidity effects. - Minor impact: Categories with relatively little effect on costs. - Compliance costs: - Initially not addressed in depth, but additional compliance costs could rise to multi-billion dollar figures. - Context: bank assets in the three regions are in the range of US$50 trillion, and many compliance costs would be one-time charges amortized over many years. - Some compliance-related changes will provide value to bank managements by improving understanding of positions and risks. *Italic: Source — _wp12233 - 0.75 percent smaller after five years, rather than 3 percent smaller in the IIF’s estimate.* ### conclusions. ### conclusions. ### III. QUANTITATIVE ANALYSIS OF STAND‑ALONE REFORMS - Five reform categories selected for quantitative analysis: capital requirements, liquidity requirements, derivatives regulations, securitization regulations, and taxes and fees. - These five categories capture most of the total cost impact of regulatory reforms; other categories are difficult to quantify and smaller in aggregate effect. - Expansion of the regulatory perimeter likely aids banks and hurts non‑banks; its exclusion should partially offset omitted areas. - Basel III drives most changes in capital requirements; leaders of the G‑20 have endorsed the changes and significant financial centers have agreed to implement Basel III. - Liquidity requirements are also driven strongly by Basel III; few nations had formal liquidity requirements before, so Basel III liquidity standards will generally determine liquidity requirements going forward. - No global agreement yet on derivatives regulation; U.S. and Europe broadly on the same track (push toward standardized trades, exchange execution, central clearinghouses; higher capital and collateral for customized trades). - No global agreement yet on securitization regulation; U.S. and Europe broadly aligned (greater transparency and “skin in the game,” likely at 5 percent, with many U.S. exemptions for Fannie Mae/Freddie Mac or mortgages meeting stricter standards). - Changes in taxation and fees vary greatly; potential financial transactions taxes considered in Europe but rejected by the United States and other countries; country‑specific changes noted (e.g., increases in deposit insurance fees in the United States). ### A. Choice of Baseline Scenario - Baseline should reflect expected post‑crisis behavior of non‑regulatory constituencies (banks’ internal risk models, rating agencies, counterparties, markets) as well as regulatory changes. - End‑2010 figures on capital and liquidity in the United States, Japan, and Europe are used as a reasonable approximation of what market forces would have demanded absent regulatory changes, with caveats: - Using end‑2010 may understate regulatory effects because some argue reaction to Basel III was partly already included by then; counterargument: markets demanded substantially higher capital and higher quality capital post‑crisis. - End‑2010 Basel III equivalent tangible common equity ratios: about 3 percent in Europe and Japan and a bit over 5 percent in the United States. - End‑2009 ratios of capital to risk‑weighted assets were approximately 0.5 to 1.5 percentage points lower, depending on the region. - Liquidity: new minimum liquidity requirements unlikely to have materially impacted bank balance sheets by end‑2010 due to multi‑year phase‑ins and regulatory uncertainty; end‑2010 levels deemed a good baseline for liquidity. - Other major proposed reforms also unlikely to be reflected materially by end‑2010 because of transition periods and regulatory uncertainty. ### B. Translating Cost Changes to Credit Impacts - Higher costs for banks/credit providers affect credit pricing and availability but not via 100 percent pass‑through; banks respond through multiple channels. - Eight broad categories of bank responses to cost increases: - Absorbing the costs by lowering returns to shareholders (limited by target return requirements; higher safety can induce investors to lower required returns). - Reducing funding costs (banks may pay less for deposits and borrowed funds; new minimum liquidity requirements likely raise average funding costs, but safety benefits and ability to reduce deposit rates partially offset this). - Reducing expenses (administrative and marketing expense cuts; more efficient banks gain market share and lower industry average expense ratios). - Decreasing expected credit losses (tougher covenants, renegotiation, altering loan terms to reduce default probability and loss severity). - Limiting regulatory impacts through technical means (improved data/modeling to justify lower risk weights, altering transaction structure, securitization or loan sales; potential “gaming” of rules). - Rationing credit (rejecting loan applications that fail heightened standards or withdrawing from unprofitable lines). - Raising prices for credit (limited by competition from non‑banks and other credit providers). - Restructuring their businesses (rethink business lines, sell/buy/merge businesses, change organizational strategy). - Likely reactions vary by reform category; combined effects considered in quantification section. ### C. Estimating Changes to Lending rates - Loan pricing formula used to translate regulatory cost changes into loan rate increases: - L*(1-t) >= (E*r_e)+((D*r_d)+C+A-O)*(1-t), where: - L = effective interest rate on the loan, including annualized fees; - t = marginal tax rate for the bank; - E = proportion of equity backing the loan; - r_e = required rate of return on the marginal equity; - D = proportion of debt and deposits funding the loan (assumed = loan minus E); - r_d = effective marginal interest rate on D, including indirect costs; - C = credit spread, equal to the probability‑weighted expected loss; - A = administrative and other expenses related to the loan; - O = other income and expense items related to the loan. - Analysis assumes additional capital requirements are met with common equity (Tier 1), not preferred equity or Tier 2; focus solely on Tier 1 common equity. - The formula translates changes in capital, funding costs, credit spreads, administrative costs, and other items into required loan rate adjustments. - The model is robust to base case assumptions for credit costs, administrative costs, and other income/expense—the marginal effect of requiring more capital is insensitive to the starting levels of those variables. - Conclusion from analysis: required increases in credit pricing are generally low enough that aggregate credit availability should not be significantly reduced; however, some loan types will be uncompetitive for banks due to non‑bank competition. ### D. Capital Requirements - Basel III sharply increases minimum capital requirements: - Minimum common equity capital ratio raised from, in practice, 2 percent of risk‑weighted assets to 7 percent, which includes a 2.5 percent “conservation buffer.” - Banks with capital below the basic 4.5 percent ratio can be taken over by regulators. - Banks above 4.5 percent but below 7 percent will face serious operating limitations (limits on compensation and shareholder payments). - Minimum quality of capital is raised: subordinated debt and some other securities are dropped from the definition of core capital; certain assets (e.g., tax loss carry‑forwards, minority stakes) limited in counting toward common equity. - Basel III capital requirements remain based primarily on risk‑weighted assets (RWA); many government obligations treated as zero‑percent risk‑weighted; standard loans 100 percent; most mortgages 50 percent. - Risk weights increased substantially under Basel III, especially for trading account assets; many increases implemented as part of Basel 2.5 interim changes. - Systemically Important Financial Institutions (SIFIs) face incremental capital requirements: - Required minimum capital to RWA ratios of 0.5 to 2.5 percentage points above those for other banks. - This can rise to 3.5 percentage points if a SIFI is perceived to be growing risks excessively despite existing requirements. *Source: _wp12233 - conclusions.* ### 2.5 percentage point incremental requirement. ### 2.5 percentage point incremental requirement. ### Basel III leverage ratio: purpose and timeline - Leverage ratio defined as capital divided by total asset size, with adjustments for off-balance sheet items and certain unfunded commitments. - Role: safety net to ensure RWA calculations do not produce excessively large balance sheets and to guard against excessive quantities of seemingly low-risk assets turning out to be risky (example noted: large holdings of sovereign debt of Eurozone countries with zero risk-weighting when acquired). - Timeline: - “Parallel run” period from 2013–17 during which it is not mandatory to remain above the minimum ratio. - Becomes a hard requirement in 2018. - Public disclosure of the ratios will be required starting in 2015. ### Theoretical benchmark (Modigliani and Miller) vs. practical distortions - Under Modigliani and Miller (1958) assumptions (perfect markets, no policy distortions), the proportion of funding from equity is immaterial to weighted average cost of funds. - Two key public-policy distortions that in practice make higher equity increase bank costs: - Tax advantage of debt (corporate deductions for interest but generally not for dividends). (Belgium noted as an exception.) - Explicit and implicit guarantees on bank liabilities (e.g., government-insured deposits; “too big to fail” perceptions), which reduce the degree to which investors lower demanded returns as bank safety increases. - Other market imperfections and agency costs can raise equity costs (e.g., negative signaling when issuing equity). - Empirical/assumption evidence on pass-through: - Common working assumption: about a 50 percent offset (pass-through) of the Modigliani-Miller effect. - One author’s earlier estimate: 50 percent offset for the United States (Elliott 2009). - Miles, Yang, and Marcheggiano (2010): Modigliani-Miller pass-through of 45 percent under one test and 75 percent under another for U.K. banks. - Conclusion: 50 percent pass-through appears a reasonable estimate, likely modestly understating long-term pass-through; complete offset is considered very unlikely. ### How banks can meet Basel III capital standards and common reactions - Main adjustment channels: - Raise equity through retaining earnings or new issuance. - Shrink assets to reduce the denominator of capital ratios. - Replace higher risk-weighted assets with lower risk-weighted assets. - Likely outcomes: - Credit pricing likely to rise and credit availability likely to fall as banks need more incentives to hold assets due to higher total funding costs. - Banks will undertake mitigating actions (expense cuts, asset composition changes, RWA optimization) to reduce the need to raise capital. ### Empirical pro-forma impacts of Basel 2.5 and III on common equity Tier 1 (CET1) ratios - Summary finding: the impact of increases in RWAs and the qualification standards for capital (deductions) arising from Basel III reduces common equity Tier 1 capital ratios by 2.5–3 percentage points on average. - Regional asymmetries: - Effect of increases in RWAs is larger in U.S. banks than in European and Japanese banks on average. - Effect of deductions against capital is higher in Japanese banks than in European and U.S. banks. - As a result, pro-forma Basel III CET1 ratios for European banks are larger than in U.S. and Japanese banks on average. - Table 4 (pro-forma averages, end-2010) — figures preserved as reported: - Initial Basel I/II common equity Tier 1 capital ratio 1/: Europe 11.0, U.S. 9.2, Japan 9.4 (table fragment labels indicate these initial values). - RWA increase arising from Basel II.5 and III 1/: Europe -3.9, U.S. -1.7, Japan -0.7 (by bank business model table fragment). - Pro forma CET1 after RWA increase 1/: Europe 7.1, U.S. 7.7, Japan 8.6 (by bank business model fragment). - Deductions arising from Basel III 1/: Europe -1.2, U.S. -1.1, Japan -0.6 (by bank business model fragment). - Pro forma CET1 after RWA increase and capital deductions (without mitigation) 1/: Europe 6.0, U.S. 6.7, Japan 7.9 (by bank business model fragment). - Mitigation 1/: Europe 0.8, U.S. 0.7, Japan 0.3 (by bank business model fragment). - Basel III pro forma CET1 after RWA increase, mitigation, and capital deductions 1/: Europe 6.7, U.S. 7.3, Japan 8.3 (by bank business model fragment). - Table 4 (regional sample averages, end-2010) — figures preserved: - Initial Basel I/II CET1 capital ratio 1/: Europe 9.7, U.S. 9.2, Japan 9.7 (table fragment). - RWA increase arising from Basel II.5 and III 1/: Europe -1.6, U.S. -1.1, Japan -2.4 (fragment). - Pro forma CET1 after RWA increase 1/: Europe 8.1, U.S. 8.1, Japan 7.3 (fragment). - Deductions arising from Basel III 1/: Europe -1.1, U.S. -1.5, Japan -0.6 (fragment). - Pro forma CET1 after RWA increase and capital deductions (without mitigation) 1/: Europe 7.1, U.S. 6.6, Japan 6.7 (fragment). - Mitigation 1/: Europe 1.0, U.S. N.A., Japan 0.3 (fragment). - Basel III pro forma CET1 after RWA increase, mitigation, and capital deductions 1/: Europe 8.0, U.S. 6.6, Japan 7.0 (fragment). - Memorandum items (sample counts and totals): Number of banks: Europe 38, U.S. 21, Japan 6; Total assets (in US$ billion) 3/: Europe 33,961, U.S. 6,038, Japan 11,522. - EBA (2011) comparison: - EBA study of end-June 2011 balance sheets for European banks concluded CET1/RWA would average about 6.6 percent if Basel III were fully applied at that point. - This compares to the 7.1 percent average shown in Table 4, suggesting modestly smaller Basel III capital ratios in the EBA exercise. ### Mitigating actions to reduce RWAs (Table 5 categories) - Four categories of mitigating actions intended to reduce RWAs: - Asset run-offs - Asset disposals - Asset impairments - Other actions such as RWA optimization and technical measures (better data and calculation methodologies) - Notes: - The first three aim to offset increases in RWAs for particular assets; they do not necessarily lead to deleveraging if associated funding is not reduced. - Most banks do not classify asset impairments as capital mitigation because impairment reduces capital while also reducing the balance sheet value of the asset. ### Differential effects by bank business model and risk weighting - Investment banks: - Although having the largest initial core Tier 1 ratios, investment banks are the most affected by Basel III capital rules. - Average pro-forma CET1 for investment banks: 6 percent before mitigation and 6.7 percent after mitigation (values reported for investment banks on average). - Universal banks and commercial banks: - Universal banks are less affected than investment banks on average. - Commercial banks are the least affected on average. - Relationship with average risk weighting: - Effects of increases in RWAs arising from Basel 2.5 and III are larger for banks with lower average risk weightings. - Figures suggest a negative non-linear relationship between average risk weighting (RWAs/Total Assets) and the effect of RWA increases on CET1 ratios for European and U.S. banks, with some suggestion of convergence in RWAs across European and U.S. banks under Basel III, although differences remain large. ### Effects on lending rates and broader economic implications - Stand-alone impact on required interest rate from higher expected capital levels: - Net stand-alone impact in the three regions on loan pricing formula is less than 25 bps. - Comparable empirical results: - Miles, Yang, and Marcheggiano (2010): 11 bps increase in lending rates in U.K. banks after allowing for a 45 percent offset. - Other findings cited: 20 bps (U.K. banks in Miles et al.) and 36 bps (U.S. banks in Gorton, Lewellen, and Metrick (2011)) for gross stand-alone effects. - Relative magnitude: - Pre-tax return on assets (ROA) in banking generally in the range of 100 bps or less. - Thus, passing along even 20 bps can be significant relative to existing profit margins, motivating mitigating actions (e.g., expense cuts). - Regulatory target and buffers assumed for analysis: - Target minimum ratio assumed: 10 percent common equity Tier 1 capital to risk-weighted assets. - This represents a buffer of 3 percentage points above the Basel III minimum of 7 percent (4.5 percent plus a 2.5 percent conservation buffer). - The additional 3 percentage points reflect: - Mandatory additional capital for Systemically Important Financial Institutions (SIFIs) and discretionary buffer. - SIFI capital surcharge initial range: 0.5 percentage points to 2.5 points, with room for regulators to increase this to 3.0 points for SIFIs already at the 2.5 point level who take on undue additional risk. - SIFI surcharges are likely to add 1.0 to 1.5 points to the required capital levels of the banking system as a whole. - Rationale: managements virtually always choose to operate with some buffer to minimize probability of regulatory intervention and avoid eating into the conservation buffer. *Source: IMF staff analysis excerpted from “2.5 percentage point incremental requirement.”* ### 1.24 percent and 2.65 percent, respectively. ### _wp12233 - 1.24 percent and 2.65 percent, respectively. ### Capital requirements: assumed returns, key ratios, and effects on lending rates - Assumed base-case return on equity required by market: 12.00 (Europe), 7.00 (Japan), 12.00 (U.S.). - Assumed base case cost of other funding sources: 2.00 (Europe), 1.25 (Japan), 2.00 (U.S.). - End-2010 pro forma Basel III common equity Tier 1 capital ratio: 7.12 (Europe), 6.57 (Japan), 6.69 (U.S.). - Capital-to-total assets ratio, without risk weighting: 3.06 (Europe), 2.95 (Japan), 5.36 (U.S.). - Assumed minimum capital-to-RWA ratio in equilibrium: 10.00 (all regions). - Implied capital-to-total assets ratio, without risk weighting: 4.30 (Europe), 4.49 (Japan), 8.01 (U.S.). - Necessary increase in capital-to-total assets ratio: 1.24 (Europe), 1.54 (Japan), 2.65 (U.S.). - After-tax unit cost of switching to capital as funding source: 10.60 (Europe), 6.13 (Japan), 10.60 (U.S.). - Stand-alone effect of higher capital on pre-tax loan interest rate: 0.19 (Europe), 0.13 (Japan), 0.40 (U.S.). - Assumed offset from reduction in return required by market (1/): -0.09 (Europe), -0.07 (Japan), -0.20 (U.S.). - Net stand-alone effect on pre-tax loan interest rate: 0.09 (Europe), 0.07 (Japan), 0.20 (U.S.). - Memorandum items: Total assets (in US$ billion): 33,961 (Europe), 6,038 (Japan), 11,522 (U.S.); Total RWA after Basel II.5 and III (in US$ billion): 14,597 (Europe), 2,713 (Japan), 9,233 (U.S.); Tax rate (in percent): 30.00 (all regions). - Sensitivity notes: - Assuming no credit from equity markets to reduced volatility would double the net effects; assuming a 75 percent pass-through to equity markets would halve the net effects. - Net effect of capital increases in the United States changes by 2 bps for each additional point in required ROE. - Raising assumed cost of other funding in the United States lowers cost of moving to higher capital by 1 bps for each percentage point increase in funding costs. - Regional comparison highlights: - Europe and Japan have average capital-to-total-asset ratios of about 3 percent; the United States is over 5 percent. - European banks have average risk-weighting roughly 40 percent versus roughly 80 percent for U.S. banks, implying Europe needs to raise roughly half as much capital per dollar of total assets to meet a given increase in capital-to-RWA ratios. ### Liquidity requirements: LCR and NSFR design, estimated gaps, and effects on lending rates - LCR: a 30-day stress test; upon full implementation the ratio required to exceed 100 percent; supervisors started monitoring in 2011; minimum standard starting in 2015. - NSFR: covers excessive maturity mismatches with a one-year cut-off; supervisors started monitoring in 2011; binding requirement in 2017. - Actions banks can take to meet ratios: - Increase length of liabilities; raise capital; shorten asset maturities; switch to higher-quality assets; shrink balance sheet (often combined with other actions). - Estimated pro-forma liquidity gaps (Table 8 summary): - Liquidity Coverage Ratio (average LCR, percent): 76 (Europe), 121 (Japan), N.A. (U.S.). - Additional liquid assets needed for a 100% LCR (in US$ billion): 1,326 (Europe), 537 (Japan), 0 (U.S. per BCBS-adjusted sample) — note: methodology yields US$695 billion LCR gap for the U.S. using alternative approach described in text. - Net Stable Funding Ratio (average NSFR, percent): 89 (Europe), 87 (Japan), N.A. (U.S.). - Additional long-term funding needed for a 100% NSFR (in US$ billion): 1,703 (Europe), 554 (Japan), 1,000 (U.S. used in Table 8; text notes US$622 billion estimate and an upper-bound approach producing US$1,000 billion). - Memorandum items: sample bank counts and total assets provided for regional samples. - Estimated effects of liquidity changes on lending rates (Table 9 key figures): - Liquid assets needed for a 100% LCR (in US$ billion): 1,434.66 (Europe), 54.21 (Japan), 700.00 (U.S.). - Reduction in liquid assets from capital increases (in US$ billion): 128.23 (Europe), 27.93 (Japan), 92.20 (U.S.). - Net liquid assets needed (in US$ billion): 1,306.43 (Europe), 26.28 (Japan), 607.80 (U.S.). - Increase in pre-tax funding cost or reduction in investment income (in percent): 2.00 (Europe), 1.25 (Japan), 2.00 (U.S.). - Reduction in pre-tax interest margin (in US$ billion) from LCR: 26.13 (Europe), 0.33 (Japan), 12.16 (U.S.); as percent of total assets: 0.08 (Europe), 0.01 (Japan), 0.11 (U.S.). - Funding needed for a 100% NSFR (in US$ billion): 1,843.29 (Europe), 563.26 (Japan), 1,000.00 (U.S.). - Net funding needed after capital offset (in US$ billion): 1,715.06 (Europe), 535.33 (Japan), 907.80 (U.S.). - Reduction in pre-tax interest margin (in US$ billion) from NSFR: 34.30 (Europe), 6.69 (Japan), 18.16 (U.S.); as percent of total assets: 0.10 (Europe), 0.11 (Japan), 0.16 (U.S.). - Elimination of overlap between actions to meet LCR and NSFR (in percent): -0.04 (Europe), 0.00 (Japan), -0.05 (U.S.). - Total net effect of LCR and NSFR (in percent): 0.14 (Europe), 0.11 (Japan), 0.21 (U.S.). - Memorandum items: Total assets (in US$ billion): 33,961 (Europe), 6,038 (Japan), 11,522 (U.S.); Tax rate (in percent): 30.00 (all regions). - Key caveats and uncertainties: - Major uncertainty in size of liquidity gaps due to lack of historical reporting and varying rule implementations. - Cost estimates for altering maturities are imprecise; BIS historical average assumption (100 bps) is lower than many analyst estimates used here. - Overlap between LCR and NSFR actions is uncertain; analysis assumes half the cost of the smaller change may be eliminated through overlap. - Costs are assumed spread evenly across the loan book and other assets, which may overstate effect on loans because investment banking activities could be hit harder. ### Derivatives reforms: clearing, margining, estimated collateral needs, and lending-rate effects - Policy changes: - Shift standardized derivatives to exchanges / similar trading venues and central clearinghouses (CCPs). - Customized derivatives to face higher capital and collateral requirements. - Increased transparency and collateral (margin) requirements; CCPs require initial margin and member default-fund contributions. - Distributional effects: - Large dealers expected to lose margin on customized derivatives but benefit partially from fee income for clearing and collateral services; net effect concentrated on major dealers. - Small and medium-sized banks and non-financial end users likely to benefit overall from lower transaction costs on standardized products, although some will face new collateral requirements. - Estimated collateral and funding impact: - Intermediate estimate for initial margin required by CCPs for interest rate and credit default swaps: US$0.7 trillion; grossed up to approximately US$1.1 trillion for all swaps. - Existing collateral at major dealers covers about 44 percent of swap exposures; estimated net new collateral required from moving to CCPs: approximately US$0.6 trillion. - Assumed net cost of funding additional collateral: 200 bps. - First-order effect of higher collateral requirements on credit costs: approximately US$12 billion a year (US$0.6 trillion times 2 percent). - Translating to lending rates: roughly 3 bps on total size of assets held by banks in Europe and the United States (noting this is illustrative). - Table 10 bank-loss estimates (selected entries): - Da Silva, Goel, and O'Donohoe (2010) — Europe: No. of banks 144; Derivative Reform Gross Loss US$4,738 million; Net Loss after Cost Reduction US$2,843 million. U.S.: Gross Loss US$3,766 million; Net Loss US$2,260 million. - Other studies show wide variation (e.g., Horowitz et al. gross loss US$6,911 million for a 4-bank U.S. sample). - Net impact on lending rates: - Effects on bank credit pricing appear quite low relative to capital and liquidity reforms; conservative assumption used here attributes large-dealer losses to the net economy impact, likely overstating economic cost. ### Securitization reforms and effects - Key reforms: - “Skin in the game” requirements (commonly 5 percent) for securitizers/arrangers in the United States and Europe; possible exceptions (e.g., QRMs, GSE securitizations in the U.S.). - Increased disclosure, underwriting standards, oversight of rating agencies, and higher capital charges for securitized assets. - Effects: - Holding 5 percent of securitizations increases banks’ capital and liquidity needs and shifts some arrangements from fee-oriented to risk-retention models, raising costs. - Administrative costs will rise; some reforms could save banks money over time if markets evolve. - Insufficient data to produce reliable quantitative cost estimates; likely magnitude comparable to derivatives reforms and substantially smaller than capital and liquidity reforms. ### Taxes and fees targeted at the financial sector - Principal categories discussed: - Increases in deposit insurance and similar premiums. - Taxes related to bonus payments above certain levels (rarely implemented; U.K. one-off 2009 bonus tax noted). - Taxes tied directly to the financial crisis (e.g., proposed Financial Crisis Recovery Fee in the U.S. which appears unlikely to pass). - Financial transactions tax (debated in Europe; opposed by U.S. and others). - Table 12 anticipated cost items (Europe / Japan / U.S.): - Financial stability contribution: 5.9 (Europe), ... (Japan), ... (U.S.). - Deposit insurance fee changes: 8.8 (Europe), 2.0 (U.S.). - Orderly liquidation fund: ... (Europe), 0.6 (U.S.). - Other fees: ... (Europe), 0.7 (U.S.). - Estimated effects on income and lending rates (Table 13): - Total estimated effect on net income (in US$ billion): 14.70 (Europe), 0.00 (Japan), 3.38 (U.S.). - Effect on pre-tax income (in US$ billion): 20.99 (Europe), 0.00 (Japan), 4.83 (U.S.). - Cost per dollar of assets (in percent): 0.06 (Europe), 0.00 (Japan), 0.04 (U.S.). - Memorandum items: Total assets (in US$ billion): 33,961 (Europe), 6,038 (Japan), 11,522 (U.S.); Tax rate (in percent): 30.00 (all regions). ### Integrated effects on credit provision and available mitigating factors - Aggregation approach: - Individual effects are added and interactions are modeled (capital–liquidity interaction explicitly included). Interactions tend to reduce net cost relative to simple summation. - Key interactions: - Higher capital generally lowers liquidity needs (capital instruments are long maturity and reduce LCR denominator / raise NSFR numerator). - Actions to improve liquidity (e.g., shifting to safer liquid assets) often reduce capital requirements due to lower risk weights. - Derivatives reforms alter capital needs (customized derivatives carry higher capital; shift to standardized alters aggregate capital demands). - Some taxes/fees exclude equity and long-term debt, creating cross-effects with liquidity and capital choices. - Mitigating factors and bank responses (list of potential adjustments banks can use to offset regulatory costs): - Absorbing costs by lowering returns to shareholders — base-case assumes approximately a 50 percent pass-through (new required return halfway between pre-regulatory return and Modigliani-Miller implied return). - Reducing funding costs: greater safety may reduce wholesale funding rates; potential to modestly squeeze deposit rates (U.S. more scope). - Reducing expenses: cuts in compensation and other operating expenses; restructuring and consolidation opportunities especially in Europe and Japan. - Decreasing expected credit losses through tighter loan terms without large volume reductions. - Technical measures to limit regulatory impacts (e.g., improved internal risk modeling to lower regulatory capital). - Rationing credit: rejecting marginal loan business. - Raising prices for credit where market permits. - Restructuring business lines, mergers, divestitures to optimize overall profitability. - Qualitative sectoral impacts: - Capital markets activities: equities business remains low user of capital and likely to sustain high ROE; plain-vanilla fixed-income business faces higher capital/liquidity burdens and may concentrate in fewer large, efficient firms, potentially raising prices via wider bid-ask spreads, higher fees, or other channels. - Overall conclusion on aggregate costs: - Capital and liquidity reforms produce the largest estimated effects on lending rates and bank profitability in non-crisis years. - Derivatives and securitization reforms likely have smaller aggregate costs, though distributional effects are important. - Interactions and mitigating actions are expected to moderate aggregate costs; the cumulative cost is probably modestly less than the sum of individual stand-alone impacts. *Source: Staff calculations and text from the provided content unit.* ### Box 1. Restructuring Strategies by Banks and Implications for the Economy ### Box 1. Restructuring Strategies by Banks and Implications for the Economy ### Restructuring strategies and channels of adjustment - Shifts in business mix - Regulatory changes will shift profitability across lines of business and products; some activities may be forbidden (example: Volcker Rule). - Higher regulatory burden can be direct (e.g., higher capital requirements for certain trading activities) or indirect (changes in customer demand). - Operational transformations - Higher costs spur efforts to improve operational efficiency. - Management and staff become more inventive and flexible when external cost pressures threaten jobs and compensation. - Consulting firms emphasize use of electronic information and processes; scope for improved efficiencies exists though consultant estimates may be optimistic. - Cultural transformations - Financial firms may refocus on core skills: risk management, expense control, and meeting genuine customer needs. - Hard to quantify, but likely beneficial for banks and the wider economy. - Mergers and acquisitions - Cost pressures likely to push consolidation; effects similar to operational transformations but larger-scale for merged firms. - In Europe, twin financial and sovereign crises could reduce protectionist regulatory barriers and enhance cross-border consolidation. ### Long-run estimated impact of regulatory reforms on lending rates (base case) - Overall conclusion: long-run impact on lending rates is low, with relatively small economic effects; comparable to or smaller than a 25 bps central bank policy-rate move. - Base-case estimated increases in lending rates: - Europe: 17 bps - Japan: 8 bps - United States: 26 bps - Credit availability - Price increases in this range are unlikely to cause broad-based reductions in credit availability; some pockets of credit rationing possible. - If non-bank providers can substitute, bank credit shrinkage may be offset by rising non-bank credit. ### Key behavioral and adjustment assumptions - Expense reductions - Analysis assumes banks can reduce expense bases by at least 5–10 percent, with approximately half of expenses being compensation. - Assumed expense reductions: full 10 percent of expenses eventually in the United States; 5 percent in Europe and Japan. - Additional adjustments - An additional 5 bps of expense cuts or revenue improvements are assumed from non-price adjustments (e.g., modestly reduced deposit rates, cross-selling, tighter covenants). - Investor reactions - The paper assumes equity investors will reduce their required rate of return on bank equity as a result of increased safety; debt investors follow to a much lesser extent. ### Quantified cumulative impacts (Table 14 summary, in basis points) - Total gross effects: - Europe: 31 - Japan: 18 - U.S.: 48 - Expense cuts (assumed: 5% for Europe, Japan; 10% for U.S.): - Europe: 8 - Japan: 8 - U.S.: 15 - Other aggregate adjustments: - Europe: 5 - Japan: 3 - U.S.: 5 - Total adjustments: - Europe: 13 - Japan: 10 - U.S.: 20 - Net cost (post-adjustments): - Europe: 18 - Japan: 8 - U.S.: 28 ### Sensitivity and uncertainty - Key parameters affecting lending-rate impacts: - Increases in required common equity Tier 1 ratio, base ROE, or marginal tax rate raise lending-rate impacts. - Increases in base cost of other funding sources and higher Modigliani-Miller pass-through assumptions reduce lending-rate impacts. - Functional form: except for the marginal tax rate, lending rates are a linear function of key parameter assumptions. - Even under extreme parameter assumptions, changes in lending rates remain below 100 bps. - Major uncertainties: - Liquidity requirements are novel and in flux. - Implementation risk: poorly structured regulation could substantially increase system costs. - Transitional effects: raising equity or shifting liquidity structure quickly can be much more expensive than in the long run; current stressed market conditions (especially in Europe) can magnify transitional credit reductions and rate increases. ### Areas requiring further research - Transitional effects of regulatory changes (quantify short-run vs. long-run costs). - Impact of regulatory arbitrage and of less-regulated credit providers (shadow banking) on traditional banking activities. - Effects on additional regions (break Europe into subregions; examine major emerging-market financial centers). - Quantitative estimates for additional categories of reform (securitization and other measures not modeled here). - Translating credit provision effects into impacts on economic output. ### Conclusion and policy-relevant implications - Financial reform increases safety margins at a cost; estimated long-run lending-rate increases in the base case are modest: 17 bps (Europe), 8 bps (Japan), 26 bps (U.S.). - Three methodological extensions relative to some prior studies lead to substantially lower net economic costs here: - Baselines assume greater market-driven safety increases prior to regulation. - Explicit allowance for bank cost reductions and other non-price adjustments (accounting for 13 bps in Europe, 10 bps in Japan, 20 bps in the U.S.). - Allowance that investors reduce required returns on bank equity as safety improves. - Net assessment: banks have considerable ability to adapt without causing radical harm to the wider economy; benefits from fewer and less costly financial crises are likely to outweigh long-run costs, though this paper does not quantify benefits. *Source: Box 1, _wp12233 - Box 1. Restructuring Strategies by Banks and Implications for the Economy* ### APPENDIX I. SUPPLEMENTARY TABLES ### APPENDIX I. SUPPLEMENTARY TABLES ### Table 15. Impact of Major Regulatory Initiatives on European and Japanese Financial Institutions - Impact matrix entries (preserve layout sequence as in source). Rows correspond to regulatory initiatives; columns correspond to sectors: Investment Large, Investment Small, Universal Banking, Life Banking, Non-bank Insurers, Capital Markets, Financials, Markets (as presented). - First block (A. Europe — Commercial Banking): - Higher capital requirements: 10 10 10 10 -2 -8 -10 - Higher liquidity requirements: 10 10 10 10 -4 -6 -10 - Tightening of derivatives regulation: 5 2 10 7 -2 -3 -4 - Accounting changes: 2 2 2 2 1 4 2 - Changes to securitization regulation: 2 2 2 2 1 4 3 - Enhanced consumer protection regulation: 2 1 1 2 1 4 1 - Expansion of the regulatory perimeter: - 1 - 1 - 1 - 1 0 4 1 - Higher taxes or fees facing financial institutions: 3 2 3 3 1 3 -1 - Changes in crisis management and resolution regimes: 4 3 3 3 -1 -1 -2 - Tougher regulation of credit rating agencies: 1 1 1 1 1 2 2 - Structural changes to banks and activity limits: 1 0 1 1 0 0 0 - Changes in regulation of compensation and governance: 1 0 2 2 0 -1 -1 - Second block (B. Japan — Commercial Banking): - Higher capital requirements: 10 10 10 10 -5 -5 -10 - Higher liquidity requirements: 5 4 10 6 -5 -5 -8 - Tightening of derivatives regulation: 5 2 10 7 -2 -3 -4 - Accounting changes: 2 2 2 2 1 4 2 - Changes to securitization regulation: 2 2 2 2 1 4 3 - Enhanced consumer protection regulation: 1 1 1 1 1 3 1 - Expansion of the regulatory perimeter: - 1 - 1 - 1 - 1 0 4 1 - Higher taxes or fees facing financial institutions: 3 2 3 3 1 3 -1 - Changes in crisis management and resolution regimes: 2 2 3 2 -1 -1 -2 - Tougher regulation of credit rating agencies: 1 1 1 1 1 2 2 - Structural changes to banks and activity limits: 1 0 1 1 0 0 0 - Changes in regulation of compensation and governance: 1 0 1 1 0 0 0 ### Table 16. European, Japanese, and U.S. Banks in the Sample - 1-European banks - 1.1-European investment banks: Barclays, Credit Suisse, Deutsche Bank, UBS - 1.2-European universal banks: Commerzbank, Credit Agricole Group, HSBC, ING, Intesa, KBC, Nordea, UniCredit, (and others listed in sample) - 1.3-European commercial banks: Alpha bank, Banco Popular Español, Bank of Cyprus, Bank of Ireland, BBVA, BMPS, Danske, Dexia, DnB NOR, EFG, Erste, Handelsbanken, Intesa, La Caixa, Lloyds Group, NBG, Nordea, Piraeus, Raiffeisen Bank International AG, Sabadell, Santander, SEB, Swebank, UniCredit - 2-Japanese banks - 2.1-Japanese investment banks: Nomura - 2.2-Japanese universal banks: Mizuho, MUFG, Resona, Shinsei, Sumitomo Holdings - 3-U.S. banks - 3.1-U.S. investment and trust banks: Bank of New York, Goldman Sachs, JPMorgan, Morgan Stanley, State Street - 3.2-U.S. universal banks: Bank of America, Citigroup - 3.3-U.S. commercial banks: American Express, BB&T Corporation, Capital One Financial Group, Fifth Third Bancorporation, Huntington Bancshares, Keycorp, M&T Bank, Northern Trust, PNC, Regions Financial Corporation, SunTrust Banks, U.S. Bancorp, Wells Fargo (and others listed) ### Table 17. Planned De-Risking Measures, End-2010 - European banks (selected entries preserving wording): - Alpha Bank: Loan deleveraging. - Banco Popular Español: IRB Model optimization, RWA improvements and others. - Bank of Ireland: Wind-down and disposal of non-core loan portfolios and through repayments/redemptions in non-core book. They include portfolios of U.K. Intermediary sourced residential mortgage; selected international niche businesses such as project finance, asset based lending and certain international corporate banking portfolios; certain international commercial investment property portfolios; and certain land and development loans. - Barclays: Sale of legacy assets and other management actions including hedging of counterparty exposures and tail risks, selling down the correlation book, and continued model refinement. - BBVA: RWA optimization and asset and portfolio management. - BMPS: Optimization of RWAs, product company structure, and real estate portfolio. - BNP: Asset repricing, strict origination policies for short-term facilities and medium-term loans, asset sales and business disposals. Downsize of mortgage specialized businesses (Hungary, the Netherlands, Norway, Spain, and Switzerland) and brokers’ activity in France and exit from leasing non-core activities (real estate leasing, specific asset leasing, etc.) and subscale countries (the United Kingdom, Hungary, Switzerland). - BPCE: Asset disposal, CVA optimization. - Commerzbank: Central clearing of OTC derivatives and adjusted framework for hedging counterparty risk. Accelerated reduction of prolongatinon rates and natural portfolio wind-down in the asset based finance unit and restructuring and sale of assets in in the portfolio restructuring unit. - Credit Agricole Group: Run-off of discontinuing operations through natural amortization of outstanding loans and active management positions, potential asset disposals, and optimization of RWAs. Withdrawal from businesses in equity derivatives and commodities. - Credit Suisse: Reduction of fixed income RWAs by accelerating exit from low revenues long-dated and unsecured trades in foreign exchange rates, selling/running off low rated positions in securitized products, right-sizing investment grade positions in credit products, focusing on executing flow-based model in larger emerging markets, optimizing towards private banking client demand in commodities, and acceleration of wind-downs. - Deutsche Bank: Sale, unwind, run-off, hedging, and optimization of securitizations, correlation trading, trading book exposures to certain emerging market sovereigns, and uncollateralized derivatives exposures (shift to OTC derivatives towards central clearing), with limited dependency on sales. - Dexia: Asset disposals and sale of Dexia banka Slovenko, DenizEmeklilik, Dexia Crediop, and Dexia Sabadell. - Eurobank: Liability management, IRB methodology, deleveraging and de-risking in Greece, Tekfen strategic sale, other (net of PSI impact). - HSBC: Reduction of non-core portfolios and legacy positions (for instance, in HSBC Finance Corporation and GB&M), correlation books, CVA and market risk mitigation, and resecuritization actions. Actions improving capital allocation include expanding in attractive markets, turnaround efforts, increase in efficiency, and disposals and closure of non-strategic business (retail banking in Russia). - ING: Sale of Real Estate Investment Management businesses in the US, Europe, and Asia. - Intesa: Active capital allocation including sale of the remaining 25% of Findomestic, Cassa di Risparmio della Spezia, and 96 branches to Crédtit Agricole Group, and the aquisition of control of Banca Monte Parma; optimization of sources and uses of capital (eg., extension of internal models, and gradual disposal of unprofitable assets. - KBC: Mitigation consisting of selling Kredyt Bank and Wart in Poland, limiting international lending and capital market activities (sale of German corporate activities, Diamond Financing, international leasing, global trade and project finance), divesting European Private Banking, complementary channels in Belgium (Fidea) and non-EU CEE countries (Russia and Serbia) and accelerated sale or unwinding of selected ABS and CDO assets. - Lloyds: Run-off of non-core assets, including treasury and customer assets (commercial real estate, wholesale, wealth and international, and retail). - NBG: Use of collective provisions, release of excess provisions in Turkey as asset quality improves, Finansbank stake offering, balance sheet management, deleveraging, sale of non-core assets and other actions. - Nordea: Credit portfolio management (portfolio composition reviews, capital efficient products, improved transparency on profitability, netting and collateral agreements) and models and process refinements (advanced IRB roll-out; foundation IRB for Standardized portfolios; internal models for counterparty credit risk; sourcing and treatment of collaterals and guarantees, and refining and improving credit processes). - RBI: Further run-down of remaining non-core financial institutions and sovereigns loan portfolio. - RBS: Run-off, impairments, and asset disposals and closures of undrawn commitments and non-core assets consisting of commercial real estate, markets, retail, corporates, SMEs, and others. - Santander: Deleveraging in mature markets. - Société Générale: Run-off and disposal of legacy assets (CDOs, RMBS and CMBS) and selected structured lending portfolios. Possible additional optimization of market RWAs (active management of counterparty risk), optimization of portfolio of activities, and releasing goodwill and RWAs. - Swedbank: Deleveraging in Baltic countries. - UBS: Reduction of investment bank assets by scaling down investment bank, CVA mitigation and optimization, reducing securitization, moving OTC derivatives to CCPs, hedging, reducing student loan auction rate securities and sales and restructuring of other legacy assets. - UniCredit: Migration of OTC derivatives to exchanges, portfolio optimization, capital management, and other mitigating actions. - Japanese banks (selected entry): - Shinsei: RWA optimization, reduction of capital deductions through disposal and run-off of non-core assets, including real estate equity investment, asset-backed investment/securities, CLO/ACPM/CFI, housing loan warehousing, etc. - U.S. banks (selected entries): - Bank of America: Wind-down of proprietary trading, reduction in high RWA positions, reduction of equity exposures, reduction of low-quality investments subject to deduction under Basel III, run-off of loan portfolio (excluding GNMA repurchases), and other measures including mitigation of counterparty and CVA exposures. - Bank of New York: Quarterly paydown of sub-investment grade securities. - Goldman Sachs: Roll-offs of the correlation book and the ratio rate of mortgages and securitizations. - Morgan Stanley: Run-off of existing inventory and new mitigation opportunities such as scheduled takedown of new inventory. - PNC: Paydown of 30 percent of sub-investment grade securities. - Source annotation in table: Source: Company reports. ### APPENDIX II. ASSUMPTIONS FOR THE CREDIT PRICING EQUATION - Marginal tax rate: - United States: A 30 percent rate was used (assumes tax management techniques reduced the effective marginal rate below the statutory 35 percent federal rate plus applicable state taxes). - Europe: 30 percent was used (based on Kopp et al. (2010) and Schanz et al (2011) for the United Kingdom). - Japan: Effective statutory tax rate currently higher, but assumed reduced to 30 percent by tax management techniques. - Minimum ratio of capital to RWA: - Referenced as explained in the text related to Table 7. - RWA as a percentage of total assets: - Taken from company reports in the sample and assumed to remain constant at end-2010 levels. - Required return on equity (ROE) used in loan pricing equation: - Europe and U.S. banks: 12 percent - Japanese banks: 7 percent - Base cost of other funding sources: - Rough estimate of weighted cost of deposits and debt funding in equilibrium; assumed higher than present historically low levels. - Administrative expenses: - Europe: based on Kopp et. al. (2010). - United States: based on Elliott (2009). - Note: Non-interest expense at United State’s banks is much higher than 150 bps, but much relates to non-lending activities; imprecision here is tangential to marginal cost analysis. - Base liquidity gap: - Taken from Table 8. - Percentage of capital that replaces short-term funding: - Assumed that 30 percent of the additional capital replaces short-term funding. - Increase in pre-tax funding cost or reduction in investment income: - Represents increased cost of shifting from short-term to long-term funding or decreased investment earnings from switching to more liquid/shorter-term assets. - Abouhossein (2011) indicates more expensive methods would cost modestly more than 200 bps. - Exact 200 bps reduction in interest margin for Europe and the United States in Table 9 is based on assumption some adjustment done with cheaper methods. - BCBS (2010) assumes a 100 bps difference in short-term and long-term interest rates based on historical figures. - Japan: adjustment cost of 125 bps is used. - Reduction in interest margin as percentage of total assets: - Costs of meeting the LCR and NSFR requirements assumed to be spread evenly across full range of bank activities. - Cost of derivatives changes: - Taken from Table 11. - Cost of new tax and fee measures: - Taken from Table 12; taxes and fees assumed not to be tax-deductible and therefore need to be offset by after-tax income from other sources. - Cost per dollar of assets, for derivative reforms and tax changes: - Costs assumed to be spread evenly across the full range of bank activities. *Source: _wp12233 - APPENDIX I. SUPPLEMENTARY TABLES (extracted content).* ### REFERENCES ### REFERENCES ### Regulatory analyses, reforms, and legal reviews - Abouhossein, K. (2010a), European Banks – Regulatory Fears now Over-discounted, JP Morgan Europe Equity Research (London). - Abouhossein, K. (2010b), Global Investment Banks – Dodd/Lincoln Bill Analysis : Implications for the Structure of the IB Industry, JP Morgan Europe Equity Research (London). - Abouhossein, K. (2011), All Eyes on Funding: LCR, the Next Undiscounted Headwind, JP Morgan Europe Equity Research (London). - Abouhossein, K., et al. (2012), Global Investment Bank: IB Landscape Changes Across the Globe—the Patch to an Acceptable ROE for Tier I and III Players, JP Morgan Global Equity Research (London). - Acharya, V., Colley, T., Richardson, M., and Walter, I. (2011), Dodd-Frank One Year Ago (London: Centre for Economic Research). - Amom, P. (2011), Dodd-Frank Act: Assessing the Regulation, Sungard (Wayne). - Choulet C. 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(2012), Measuring the Impact of Prudential Policy on the Macroeconomy: A Practical Application to Basel III and Other Responses to the Financial Crisis, Occasional Paper Series, No. 42, (London: Financial Services Authority). - Hansen, M., Moss, J., Grossman, R., and Murray, A. (2012), Basel III: Return and Deleveraging Pressures, Fitch Ratings Macro-Credit Research (New York). - LeLesle, V., and Avramova, Sofiya, “Revisiting Risk-Weighted Assets,” IMF Working Paper, 12/90 (Washington: International Monetary Fund). ### Macroeconomic and quantitative assessments of regulatory impact - Chan-Lau, J.A. (2011), “Capital Requirements, Leverage Ratio, Countercyclical Buffers, and Dynamic Provisions,” in “Policy Instruments to Lean Against the Wind in Latin America,” by G. Terrier et al. IMF Working Paper 11/159 (Washington: International Monetary Fund). - Claessens, S., Keen, M., and Pazarbasioglu, C. (2010), “Financial Sector Taxation: The IMF’s Report to the G-20 and Background Material,” (Washington: International Monetary Fund). - Elliott, D.J. (2009), Quantifying the Effects of Lending Increased Capital Requirements (Washington: The Brookings Institution), http://www.brookings.edu/papers/2009/0924_capital_elliott.aspx. - Elliott, D.J. (2010a), A Further Exploration of Bank Capital Requirements: Effects of Competition from Other Financial Sectors and Effects of Size of Bank or Borrower and of Loan Type, (Washington: The Brookings Institution), http://www.brookings.edu/~/media/Files/rc/papers/2010/0129_capital_elliott/0129_capital_requirements_elliott.pdf. - Elliott, D.J. (2010b). A Primer on Bank Capital, The Brookings Institution, (Washington: The Brookings Institution), http://www.brookings.edu/~/media/Files/rc/papers/2010/0129_capital_elliott/0129_capital_primer_elliott.pdf. - Elliott, D.J. (2010c), Financial Reform: Now It’s up to the Regulators, (Washington: The Brookings Institution), http://www.brookings.edu/papers/2010/0712_regulators_elliott.aspx. - Elliott, D.J. (2010d), The Danger of Divergence: Transatlantic Cooperation on Financial Reform, (Washington: Atlantic Council), http://www.brookings.edu/reports/2010/1007_atlantic_council_elliott.aspx. - Roger, S., and Vlcek, J. (2011), “Macroeconomic Cost of Higher Bank Capital and Liquidity Requirements,” IMF Working Paper, 11/103 (Washington: International Monetary Fund). - Kopp, E., Ragacs, C., and Schmitz, S. (2010), The Economic Impact of Measures Aimed at Strengthening Bank Resilience—Estimates for Austria, Financial Stability Report, 20 (Vienna: Oesterreichische National Bank), pp 86–114. - Schanz, J., Aikman, D., Collazos, P., Farag, M., Gregory, D., and Kapadia, S. (2011), The Long-Term Economic Impact of Higher Capital Levels, BIS Papers, 60 (Basel: Bank for International Settlements), pp. 73–81. - Otker-Robe, I., and Pazarbasioglu, C. (2010), “Impact of Regulatory Reforms on Large and Complex Financial Institutions,” IMF Staff Position Note, 10/16 (Washington: International Monetary Fund). - Ötker-Robe, I., Narain, A., Ilyina, A., and Surti, J. (2011), The Too-Important-to-Fail Conundrum: Impossible to Ignore and Difficult to Resolve, IMF Staff Discussion Note, 11/12 (Washington: International Monetary Fund). ### Industry and equity/credit research on bank earnings, structure, and market impacts - Cannon. F., McGratty, C., Kleinhanzl, B., and Konrad, D. (2010), Our First Go at Basel III for the BKX, The BKX Monthly: Large Cap Banks (New York). - Da Silva, C. A., Goel, A., and O’Donohoe, N. (2010a). Global Banks—Too Big to Fail? A Review of Regulatory Proposals, JP Morgan Global Equity Research (London). - Da Silva, C. A., Goel, A., and O’Donohoe, N. (2010b). Global Banks—Too Big to Fail? Big Can (also) Be Beautiful, JP Morgan Europe Equity Research (London). - Da Silva, C. A., Goel, A., and O’Donohoe, N. (2010c). Global Banks—Too Big to Fail? Running the Numbers, JP Morgan Europe Equity Research (London). - Da Silva, C. A., Goel, A., and O’Donohoe, N. (2010d). Global Banks—Too Big to Fail? Regulation—A clearer Pictures Emerges, JP Morgan Global Equity Research (London). - Da Silva, C. A. (2011). European Banks: The Lost Decade, Credit Suisse Equity Research (London). - Goldberg, J., Blyakher, I., Keating, M., and Nash, R. (2010) (2010). Large-cap/Mid-Cap Banks 1Q10 10-Q Review—Quantifying the Regulatory Impact, Barclays Capital Equity Research America (New York). - Horowitz, K., Foundos, S., Ketron, G., and Fandetti, D. (2010), U.S. Financials: Regulatory Reform Update—Assessing EPS Impact in an Uncertain Environment, Citigroup Global Markets (New York). - Kono, A. (2010), Update on Global Financial Regulation—U.S. Banks Face Largest Earnings Impact, JP Morgan Japan Equity Research (Tokyo). - Morgan Stanley and Oliver Wyman (2011), Wholesale & Investment Banking Outlook – Reshaping the Model, Morgan Stanley Research Global (New York). - Moszkowki, G., Goldschneider, S., and Chubak, S., (2010), FinReg Update: Senate Version likely to Dominate, Bank of America-Merrill Lynch Industry Overview (New York). - Samuels, S., Harrison, M., and Rajkotia, N. (2012), Bye Bye Basel? Making Basel More Relevant, Barclays Equity Research (London). - Tamura, S., and Tani, M. (2009), Japan’s Major Banks: Industry Overview, Barclays Capital Equity Research (London). - The Clearing House Association (2011a), How Much Capital Is Enough? 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(2010), “What to do about TBTF?,” paper presented at the Federal Reserve Bank of Atlanta 2010 Financial Markets Conference—Up From the Ashes: The Financial System After the Crisis, Atlanta, May 12. - Flannery, Mark J. (2009), “Stabilizing Large Financial Institutions with Contingent Capital Certificates,” (unpublished; Gainesville: University of Florida). - Gorton, G., Lewellen, S., and Metrick, M. (2011), “The Cost of Bank Capital: Thinking beyond Modigliani and Miller” (unpublished; New Haven: Yale University). - Haldane, A., Brennan, S., and Madouros, V. (2010). “What Is the Contribution of the Financial Sector: Miracle or Mirage?” in The Future of Finance: The LSE Report by A. Turner et al. (London: London School of Economics and Political Science). - Herring, R.J., and Calomiris, C.W. (2011), “Why and How to Design a Contingent Convertible Debt Requirement,” (unpublished; Philadelphia: University of Pennsylvania and New York: Columbia Univerisity). - Modigliani, F., and Miller, M.H. (1958), “The Cost of Capital, Corporation Finance, and the Theory of Investment,” American Economic Review, Vol. 48, No. 3, pp. 261–97. - Myers, S. (1984), “The Capital Structure Puzzle,” Journal of Finance, Vol. 39, No. 3, pp. 573–92. - Myers, S., and Majluf, N. (1984), “Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have,” Journal of Financial Economics, No. 13, pp. 187–221. - Miles, D., Yang, J., and Marcheggiano, G. (2011), “Optimal Bank Capital,” External MPC Unit Discussion Papers, 31 (revised and extended version), (London: Bank of England). - Kato, R., Kobayashi, S., and Saita, Y. (2010), “Calibrating the Level of Capital: The Way We See It,” Bank of Japan Working Paper Series, 10-E-6 (Tokyo). - King, M. R. (2010), “Mapping Capital and Liquidity Requirements to Bank Lending Spreads,” BIS Working Papers, 324 (Basel: Bank for International Settlements). ### Market infrastructure, derivatives, collateral, and systemic risk - Deloitte (2011), “Central Clearing for OTC Derivatives Impact on OTC Revenues—What Can You Expect beyond Compression?,” Perspectives on Financial Reform, No. 4 (New York). - Singh, M. (2010), “Collateral, Netting, and Systemic Risk in the OTC Derivatives Market,” IMF Working Paper, 10/99 (Washington: International Monetary Fund). - Heller, D., and Vause, N. (2012), “Collateral Requirements for Mandatory Central Clearing of Over-The-Counter Derivatives,” BIS Working Papers, 373 (Basel: Bank for International Settlements). *Source: _wp12233 - REFERENCES* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2012/_wp12233.pdf_