This study gives a general and preliminary assessment of the macroeconomic impact of implementing Basel III in the Philippines. The new framework seeks to significantly increase the quality and required level of banks’ capital. Hence, it is expected to strengthen banks’ capacity to absorb risks and reduce the probability of future banking crises. Nevertheless, different strategies adopted by banks to meet the new rules–such as increasing lending rates–can impact negatively on the economy.
The cost of implementing Basel III is estimated from the impact of higher capital requirement on GDP using an unrestricted VAR model, while the benefit is estimated using the expected default probability of banks. Results suggest that the higher capital requirements imposed by Basel III may have an initial negative impact on the Philippine economy. Nevertheless, the new requirements reduce the probability of a crisis. The estimated net effect of Basel III implementation in the Philippines is positive, albeit modest.
