Researchers' Assumptions Drive Conflicting Estimates of the Cost of Basel III

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Financial services industry veteran Philip Lawton commented on a study released by the IMF. Reaching consensus on the cost of reform will be difficult.

Philip Lawton

The philosophical questions of scientific independence and objectivity have real-world consequences.

Philip Lawton said today that sharp differences in cost estimates raise questions about the credibility of research on the economic impact of Basel III and other new financial regulations. “In view of the strongly partisan disagreement over the proper extent of regulation that is currently playing out in the U.S.,” Lawton said, “the philosophical issues of scientific independence and objectivity have real-world consequences.”

Lawton’s remarks focused on an analysis, sponsored by the International Monetary Fund (IMF), of the impact key Basel III requirements may have on the cost of banks’ lending activities. The paper estimated that provisions related to capital, liquidity, derivatives, and taxes and fees will increase banks’ ongoing costs by 0.20% in the U.S., 0.13% in Europe, and 0.10% in Japan. In comparison, a study conducted one year ago by the Institute of International Finance concluded that the post-transition cost of lending is likely to rise by 2.43% in the U.S., 3.28% in Europe, and 1.81% in Japan.

Assumptions made by the authors of the IMF working paper tend to reduce the expected economic impact of the new regulatory standards. At issue, in particular, are transitional costs, the appropriate baseline period, banks’ mitigating actions, and investors’ required rates of return on bank equity.

Market participants can critically evaluate economists’ assumptions, methods, data, and logic. Lawton said, “Regulators charged with presenting cost-benefit analyses to legislative bodies have the far more difficult task of persuading the opposition to accept their conclusions.”

Philip Lawton has more than 30 years of experience as an investment professional. He is most recently the author of Middle Office: Managing Financial Institutions in Turbulent Times. For more information please visit

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