Impact of the final Basel III framework in Sweden

In December 2017, the Basel Committee on Banking Supervision agreed on a new regulatory framework, denoted ‘Final Basel III Framework’. The accord sets out revised international standards, which are now to be implemented on a European level. Among other things, the package includes so-called capital floors which define a minimum level of capital for different types of portfolios. On that basis, the Swedish Bankers’ Association invited Copenhagen Economics to conduct a macroeconomic impact assessment. The resulting study was published in November 2019.

This report is a follow-up, specifically covering the impact of the final Basel III reform in Sweden, and was commissioned by the Swedish Bankers’ Association.

For the Swedish banking sector and economy we find:

• The accord will increase minimum required capital for Swedish banks by around 31%. For the corporate portfolio, the impact will be considerably higher. Translated into absolute levels, the 31% increase in capitalisation corresponds to some SEK 200 bn.
• The higher capitalisation means that banks need to hold a higher share of the more expensive equity. This increases costs for banks which they will pass on to their customers. We estimate that the higher levels of required capital will increase the total annual costs for Swedish banking customers by some SEK 30 bn. This corresponds to a price increase of around 7%.
• We expect that corporate customers will carry around two thirds of the costs. Consequently, we estimate that interest rates for Swedish corporates increase by some 0.5 percentage points, an increase in the cost of lending of around 40%-50%.
• Large, unrated corporates with a long track record of no default will be highly affected; capital requirements could increase by a factor of 3-5. This will imply increases in interest rates in the magnitude of 1-1.2 percentage points – with the current interest rates, this is close to a doubling in lending costs.
• The higher interest rate for businesses will cause a decline in the credit demand and, consequently, a decline in investment. This reduces productivity and, eventually, leads to a decline in GDP. We expect that the package will lead to a permanent reduction in the level of Swedish GDP of around 0.8%.

Our conclusion is that a one-to-one implementation of the Final Basel III Framework, will significantly increase financing costs for Swedish businesses, which will bring about costs far exceeding potential benefits.

The study is commissioned by the Swedish Bankers’ Association.