To hear banks tell it, new regulations designed to keep them from wrecking the global economy again are themselves going to wreck the global economy. But it turns out the banks do not have much proof for their scary claims.
In fact, the evidence is starting to pile up that tighter bank regulations won't cost the economy much at all.
The International Monetary Fund earlier this week released a report, entitled "Estimating the Costs of Financial Regulation," which estimated that new international rules requiring banks to hold more capital and be better prepared for financial shocks would result in a jump in U.S. borrowing costs -- by an entire 0.28 percentage points. In Europe, the effect would be even lower: an increase of 0.17 percentage points. And in Japan, the effect would be 0.08 percentage points of added borrowing costs.
Compare and contrast this with the recent estimate by the nonprofit group Better Markets, that the financial crisis has cost the U.S. economy alone at least $12.8 trillion. Another report two years ago by the Pew Economic Policy Group estimated direct costs of the crisis at about $12 trillion and 5.5 million lost jobs. In light of such costs, an extra 0.28 percentage points on your next mortgage or car loan doesn't seem like such a high price to pay.
As Bloomberg points out, the banks have their own study to wave in our faces, from a year ago, warning bank regulations will crush global gross domestic product by 3 percent and cost more than 7 million jobs. That report was prepared by the Institute for International Finance, a trade group for banks.
Although the IMF generously declared the banking group's study "admirably comprehensive and detailed," it also pointed out that most other studies have found regulation would create a far, far smaller impact. The Institute for International Finance expects regulations to add 5 entire percentage points to borrowing costs -- that 4 percent mortgage becomes a 9 percent mortgage, in other words -- but the IMF finds that claim highly dubious.
The banking group's regulation-cost report assumes that banks would typically be just as wild and wooly with risk as they were before the crisis, something the IMF doubts. That makes a difference, because it changes the baseline of behavior that will be changed by new regulations. If banks are already holding more capital and behaving less crazily -- which they are, for the most part -- than making them hold a little more won't have much extra impact. The Institute for International Finance's regulation-cost study also assumes banks have little room to cut costs, another assumption the IMF also doubts.
The IMF points to two other studies, one by the Organization for Economic Cooperation and Development and another by the Basel Committee on Banking Supervision, which found tighter bank regulations would shave 0.75 percent or 0.6 percent, respectively, from global GDP in five years -- again, a fairly small price to pay compared with the enormous hit to global GDP caused by the crisis.
A third study, by the Bank for International Settlements, released in March, found borrowing costs would rise by about 0.2 percentage points around the world -- consistent with the IMF's study.
Some of these other studies focus mainly on the so-called "Basel III" regulatory reforms, which require banks in developed countries to hold more capital and be better able to withstand shocks. The IMF study also tries to estimate the cost of some other reforms, such as derivatives reforms and higher deposit-insurance fees.
More regulations no doubt mean more costs. But so far, all the evidence suggests the costs are negligible.
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