An Assessment of the Long-Term Economic Impact of the New Regulatory Reform on Hong Kong

Abstract

This note provides a cost-benefit analysis of the proposed regulatory reform by the Basel Committee on Banking Supervision (BCBS) for Hong Kong. Following largely the methodology of a cross-country analysis by the BCBS, the long-term benefit from the reform is assumed to be derived mainly from a lower probability of a banking crisis, while the cost is mainly reflected in a lower level of GDP because of a higher lending rate charged by banks to compensate for the cost of compliance with the new regulatory standards. Our assessment results suggest that the regulatory reform would bring a net positive long-term effect for the Hong Kong economy, largely consistent with the overall assessment for selected economies by the BCBS. However, the net benefit for Hong Kong is estimated to range from 2.11% to 2.76% (in terms of real GDP) compared with the average estimates of 4.30% to 5.85% by the BCBS, assuming that banking crises cause a permanent GDP loss. The mild impact for Hong Kong probably reflects that, with the already strong capitalisation of the Hong Kong banking sector, the marginal benefit of higher capital may be relatively mild.