Good news! Central bankers just got another reason to put off raising interest rates.
A study by researchers at the Organization for Economic Cooperation and Development says international rules raising bank capital levels will slow economic growth only a bit in coming years, by slightly raising borrowing costs.
The report counters the banking lobby’s reflexive claim that any rules imposed on bankers threaten to kneecap economic growth.
But by now we have all learned you can’t tiptoe too carefully around the bankers, after all they have done for us. So the report sketches out how policymakers could mitigate even the modest effect of the new rules — by running their favorite play, holding down short-term interest rates.
The findings are in a paper released Thursday by Patrick Slovik and Boris Cournède, who are economists in the OECD Economics Department. The release comes as policy wonks descend on Paris for the G20 meeting of finance ministers and central bank governors Friday and Saturday.
The researchers say implementing the Basel III bank capital rules should cut gross domestic product growth in the United States, Europe and Japan by between 5 and 15 basis points, or hundredths of a percentage point, annually by 2015. That slowdown will come about as banks boost their lending spreads by 15 basis points or so, Slovik and Cournede say, to offset the profit-damping impact of lower leverage.
Rising bank capital levels will lead to a bigger increase in lending spreads in the United States than in Europe or Japan, the OECD paper says, because U.S. banks tend toward riskier balance sheets. But the impact on the U.S. economy is muted because banks here account for just a quarter of credit creation – just a third of the level in the other rich regions.
In any case, slightly higher borrowing costs seem like a fairly modest price to pay for hopefully fending off another global banking meltdown, even if it does stand to crimp profit growth at JPMorgan (JPM) and Goldman Sachs (GS), boo hoo.
But of course policymakers are sensitive to the criticism that they risk short-circuiting a weak recovery by keeping too tight a rein on the banks, which after all remind us at every turn that their lending lies at the heart of the global economy.
So how might the Ben Bernankes of the world ease the bankers’ pain? By leaning on interest rates, assuming they ever get above zero during the next decade in the first place.
“To the extent that monetary policy will no longer be constrained by the zero lower bound, the Basel III impact on economic output could be offset by a reduction (or delayed increase) in monetary policy rates by about 30 to 80 basis points,” the report says.
Of course, for now central bankers are keeping rates near zero because they know how weak the recovery is and see little risk of rising prices feeding through to higher wage demands.
But down the road they have other motivations to keep rates low, including the sticker shock that could hit the U.S. budget when higher interest rates push up federal borrowing costs. There is every indication they will continue playing the low rates card until the screaming about inflation goes off the decibel chart.
And with today’s paper, you can add keeping the bankers happy – always an important consideration – to the list of reasons rates may stay lower longer than you think.
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