BASEL, Switzerland (
) -- Two key committees on international bank regulations sought to assuage industry concerns about the impact of stricter capital standards that are expected to release in a few months.
In a joint statement on Tuesday, the Basel Committee on Banking Supervision and Financial Stability Board (FSB) said that the long-term benefits of requiring banks to hold more capital against potential loan-losses far outweighs the short-term costs of implementation.
"The economic benefits of the proposed reforms are substantial and need to be considered alongside the analysis of the costs," said Nout Wellink, chairman of the Basel Committee. "These benefits result not only from a stronger banking system in the long run, but also from greater confidence in the stability of the financial system as soon as implementation starts."
Mario Draghi, who chairs the FSB, characterized the near-term costs as "manageable" and the long-term benefits as "substantial."
Unconfirmed reports have suggested that the new so-called "Basel III" standards will be tougher on the banking industry than the financial reform bill that was recently signed into law in the United States. UBS analysts have pegged the capital gap created by new Basel standards at $375 billion.
Such reports come at a time when the market is increasingly concerned about a double-dip recession and near-term deflation.
An analysis issued by the two international committees, however, said that for every 1% increase in capital ratios, growth would fall by only 0.04% a year over four-and-a-half years. A 25% hike in the level of "liquid" assets that banks are required to keep, such as cash and certain types of securities, would have even less of an impact.
The debate on bank capital was particularly heated in the U.S. leading up to the passage of the Dodd-Frank Act.
One industry group said that a single
proposal on derivatives might force the industry to retain an additional $1 trillion in capital; small banks were worried that they
might have to raise tens of billions of dollars to replace trust-preferred securities; and a
group of analysts estimated that Bank of America, Wells Fargo, Citigroup and JPMorgan Chase might have to raise $86 billion in fresh capital to cover those items.
Throughout the debate, banks have received
conflicting signals on how much capital they ought to retain, thereby
hindering their desire to originate new loans.
The final ruling on international capital standards are expected to be unveiled at the G-20 conference in November.
-- Written by Lauren Tara LaCapra in New York
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