Impact Estimates

In November 2015 an experts group chaired by the head of the Bank for International Settlements (BIS) Secretariat for the Committee on the Global Financial System submitted to the Financial Stability Board a report estimating the economic costs and benefits of TLAC implementation (Tsatsaronis et al.

2015). The study considered combinations of two alternative TLAC leverage targets (6 percent and 10 percent of the exposure measure [liabilities]) and two alternative targets for the ratio of TLAC to risk-weighted assets (16 percent and 20 percent). For 30 G-SIBs, it found that the median shortfall from the resulting TLAC targets ranged from €14 billion to €53 billion per large bank, an aggregate of €750 billion to €1.8 trillion. The report assumed that to meet the targets, banks would replace the next-most-expensive liabilities by more costly TLAC-eligible liabilities. The consequence would be to raise the average cost of TLAC and “other selected marketable liabilities” that meet some but not all criteria for TLAC eligibility by a range of 43 to 115 basis points across the four combinations of target leverage and target ratio to risk-weighted assets (p. 8). After further allowance for a 30 basis point increase in response to increased issuance of TLAC liabilities and after placing the share of G-SIBs in total bank lending at 40 percent, the study calculates that average bank lending rates would rise by 5 to 9 basis points for the two variants with 6 percent TLAC leverage and 14 to 15 basis points for the two variants with 10 percent leverage (p. 14).

To arrive at macroeconomic consequences, the study uses a central parameter from 80 macro-models involved in the Macroeconomic Assessment Group (MAG 2011) exercise: A 10 basis point rise in the economywide lending rate reduces the level of long-run GDP by 9 basis points (p. 16). This impact seems much too small.

Using the aggregate production function approach of Miles, Yang, and Marcheggiano (2012) (also applied in chapter 4) and assuming a moderate capital share of one-third and a relatively high base of a 10 percent real interest rate for the cost of capital, a 10 basis point increase in the economywide lending rate would reduce long-term output by 25 basis points.^[167] The study finds that the TLAC requirements would reduce long-term output in a range from about 5 basis points for low targets to 13 basis points for the high targets with high levels of G-SIB market share. If the diagnosis about understatement of output impact is correct, by implication the appropriate range would be 12 to 33 basis points. At the upper end, a permanent loss of 0.33 percent of output would have a capitalized equivalent of 13 percent of one year's GDP (discounting at 2.5 percent in real terms) (0.33/0.025 = 13).

The expert group's study then examined the benefits of TLAC. They find that TLAC would reduce excessive risk taking of large banks caused by the TBTF subsidy. They cite Afonso, Santos, and Traina (2014) for empir-

ical support of this incentive distortion (22). Their central estimate is that the disciplining effect of TLAC would reduce the likelihood of financial crisis by 26 percent (from an annual probability of 2.3 to 1.7 percent (pp. 24-25).^[168] They use the BCBS (2010a) central estimate of 63 percent of one year's GDP as the cost of a financial crisis. By implication the TLAC requirement would generate gross gains of 0.38 percent of GDP annually (0.38 = 63 ? (0.023 - 0.017)), although the study does not mention this implied estimate. By itself, this crisis-reducing benefit would be on the same order of magnitude as the annual cost for the high targets and high G-SIB case using the expansion suggested above (i.e., 38 basis points benefit compared with 33 basis points cost).

The authors then add other benefits from the fiscal savings of avoiding bailouts, calibrated based on the difference between the Basel III minimum 8 percent of risk-weighted assets and 20 percent of risk-weighted assets in TLAC. They estimate that the availability of the fiscal savings for alternative stimulus in the crisis would translate to a benefit of 3.8 percent of one year's GDP, reducing the total present value of damage from 63.0 to 59.2 percent. They postulate that a further benefit from avoidance of increased sovereign yields would translate into an additional gain of 1.6 percent of one year's GDP, reducing the present value of damage further to 57.6 percent. Their overall central estimate is that TLAC benefits would amount to 48 basis points of GDP (with about four-fifths of the total coming from the crisis probability reduction and one-fifth from the fiscal effects).

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Source: Cline W.. The Right Balance for Banks. Peterson Institute for International Economics,2017. — 281 p.. 2017

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