ISSUE 2010/10 OCTOBER 2010 THE UNEQUAL EFFECT OF NEW BANKING RULES IN EUROPE

• The banking rules commonly referred to as Basel III will be associated with a tightening of credit conditions. The estimated macroeconomic costs range from 0.2 percent to 1.5 percent of GDP for each percentage rise in the capital ratio. • An optimistic view is that the monetary policy response will be accommoda-ting, but this is unlikely. However, the pessimistic scenario of a significant impact on lending spreads because of a ‘reputational cost ’ associated with the failure to meet the requirements, is also unrealistic, given the long imple-mentation phase that was recently agreed for Basel III. • The aggregate costs of the measures will be somewhere in between, but on aggregate closer to lower bound estimates. Costs will be differently distribu-ted across countries depending on initial conditions, modalities of imple-mentation, the relative importance of bank credit, and firms ’ latest financing needs and ability to access alternative funding sources