Gauging the Macroeconomic Impact of Basel III on Malaysia

This study gives a preliminary assessment of the macroeconomic impact of implementing Basel III in Malaysia. This is also an attempt to contribute to the increasing studies for emerging economies, especially focusing on SEACEN members. The Basel III standards seek 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. This study uses the structural model to assess the benefits and costs of implementing Basel III. The benefit is estimated using the expected default probability of banks while the cost is estimated from the impact of higher capital requirement on GDP. Results suggest that the benefits still outweigh the costs. The estimated net effect of Basel III implementation in Malaysia is positive, albeit modest.