Basel III: Is the cure worse than the disease?

This paper discusses the economic impact of the Basel III reforms to banking regulation. We find that the long-term impact should be much less than many in the industry fear but the required accompanying changes to business models, business processes and governance, need to be carefully managed to avoid a severe shortage of funding. We agree with critics of Basel III that there is a real danger that reform will limit the availability of credit and reduce economic activity. But the problem is not higher capital and liquidity requirements per se but rather the difficulties of ensuring a coordinated adaption to the new rules across the entire financial services industry. The authorities must use the long period of Basel III implementation to engage both banks and investors in constructive dialogue about the required operational and business changes. If these are not forthcoming, then the cure will indeed turn out to have been worse than the disease. (C) 2012 Elsevier Inc. All rights reserved.