NEW WORLDWIDE rules for banks’ capital and liquidity will have a very modest impact on economic growth as they are phased in, but will result in substantial long-term benefits, according to the international committees of central bankers and financial supervisors charged with drafting the rules.

The new “Basel III” rules will cause some tightening in lending during the phase-in period, but to a much lesser degree than forecast by banks, the Basel Committee for Banking Supervision and the Financial Stability Board (FSB) said yesterday.

Basel III will likely impose upon banks a core Tier 1 capital ratio – roughly equivalent to tangible common equity ratio – of 4-6 per cent, sources said last week.

These proposals are less stringent than new rules laid down by the Financial Regulator earlier this year, under which Irish banks must have core Tier 1 capital of 8 per cent, with an equity capital ratio of 7 per cent. These levels must be met by the end of the year.

Dr Elaine Hutson, lecturer in finance in UCD, said the new capital ratios would probably have little effect on Irish banks due to the efforts by the Financial Regulator to strengthen balance sheets.

Recent stress tests carried out by the EU bank regulator, the Committee of European Banking Supervisors, saw institutions subject to a target of 6 per cent Tier 1 ratio. Bank of Ireland and AIB both passed the stress tests.

The regulations are designed to make financial crises less likely.

“The analysis shows that the macroeconomic costs of implementing stronger standards are manageable . . . while the longer-term benefits to financial stability and more stable economic growth are substantial,” FSB chairman Mario Draghi said.

The FSB said its analysis showed that for each percentage point rise in the ratio of tangible common equity to risk-weighted assets over four years, global GDP would decline by 0.2 per cent.