Bankers question Wellink’s claim on Basel III economic impact

Bankers question how the committee chairman can accurately estimate the impact of Basel reforms.

Nout Wellink, Basel Committee

Claims by Nout Wellink, chairman of the Basel Committee on Banking Supervision and president of the Dutch central bank, that reforms to Basel II could cut global economic growth by up to 1 percentage point have been questioned by industry participants.

The estimate was made by Wellink in an interview with the Financial Times, published yesterday. Citing research by economists at the Dutch central bank, De Nederlandsche Bank (DNB), Wellink said the proposed reforms could cut global growth by between 0.5 and 1 percentage point over the next few years. He called industry estimates of a 5-percentage-point cut "crazy".

However, risk managers question how DNB would be in a position to make these estimates when a quantitative impact study (QIS) was only completed last week and the results have yet to be analysed. The various proposals have also yet to be calibrated, bankers note.

"I don't know how you can know that. We don't know the levels and we don't know the details, so it's difficult to have a deep understanding of the effects," says the chief risk officer at a European bank.

Even if the DNB analysis had been made on the basis of a fully calibrated set of proposals, some regulatory capital experts believe the 1-percentage-point estimate appears on the low side. Some argue the amount of capital firms will be required to hold under the new Basel rules will severely constrain bank lending and curtail economic growth by much more.

The figure looks on the low side to me, unless Mr Wellink is thinking of a significantly smaller or less severe package than that foreshadowed in their consultative paper.

"The figure looks on the low side to me, unless Wellink is thinking of a significantly smaller or less severe package than that foreshadowed in their consultative paper. But I would think he is trying to establish the idea there is some GDP reduction that it is worth sacrificing in order to strengthen banks," says the head of Basel II at a large US bank.

In comments filed with the Basel Committee last month, JP Morgan estimates every $100 billion drop in bank lending translates into a $30 billion reduction in US GDP. In its comments, Wells Fargo claims lending would drop by $3 trillion if US banks shrink their balance sheets to avoid having to raise the estimated $250 billion–300 billion in new capital the Basel Committee's proposals would require.

By putting those figures together, it implies a $900 billion reduction in GDP – the equivalent of a 6.3% drop from last year's estimated $14.25 trillion total.

The Dutch central bank says the 1-percentage-point estimate is not the result of official research, but rather the thinking of its economists based on current proposals. Those estimates might have to change as a result of the committee's final calibration of the measures later this year.

"Calibration is still needed to find out what sort of effects these measures are going to have, but Mr Wellink wanted to make the point they won't have as big an impact as those banks that oppose the measures have tried to suggest," says a DNB spokesperson.

However, bankers maintain the impact of the rules could have a much more severe effect on the economic growth of individual countries.

"The figure is very surprising because we expect the impact to be much higher. It is also very misleading because the effect of the reforms on individual countries is going to vary tremendously and the 0.5 to 1-percentage-point dive in global GDP will mask much larger drop-offs in different jurisdictions whose economies are heavily dependent on the banking sector – the UK being one example," says the head of Basel implementation at a UK bank.

Bankers have had to contend with another reality check this week, following the QIS submissions to the Basel Committee last Friday. Despite calls from both banks and some regulators for a delay to the reform process, the Basel Committee's secretary-general, Stefan Walter, confirmed earlier this week that the committee will push ahead to calibrate the measures by the end of the year, with the goal of implementation by the end of 2012.

"A couple of weeks ago, I thought they could postpone Basel III into 2011. But then you see reports like these, with people saying it could hit growth by 0.5 to 1 percentage point. If that is the cost of stability, they will go for it. That's quite a big threat and we're not used to it – we had such a long time to calibrate Basel II," says the head of the Basel II programme at a large Nordic bank.