The results show that an increase in the capital to assets ratio by 20% reduces the GDP per capita by 1.6% for the whole sample, and by 2.5% for the emerging markets, while the increase of the liquid reserves to assets ratio by 20% adversely impacts the GDP per capita by 0.4% and 0.5%, respectively. Another research, conducted by the International Institute of Finance (IIF), a private sector institution, in 2011, finds pronounced net cumulative impact on economic activity of the proposed financial sector reforms (both, CAR and LCR) estimating that the level of GDP will be 3.2% lower than it would otherwise be after five years with an output loss of 0.7% per annum. On the other hand, the analysis conveyed by the Macroeconomic Assessment Group (MAG), which was set up by the BCBS and FSB in 2010 with a purpose of assessing the macroeconomic effects of the new Basel III proposals suggests a modest impact on aggregate output of the transition towards higher capital and liquidity standards. According to MAG’s assessment results, a 1 percentage point increase in the target ratio of tangible common equity (TCE) to risk-weighted assets is estimated to lead to a decline in the level of GDP by a maximum of about 0.19% from the baseline path after four and a half years (equivalent to a reduction in the annual growth rate of 0.04 percentage points over this period).
Loss of diversification benefits Another important drawback in this regard is the initiated process of deleverage of western banks, their more pronounced concentration on home markets and the general fragmentation of international banking model that could deplete the financial markets of EE’s, slow down the process of their regional integration and globalization and will eliminate the potential diversification benefits for their investors. Incentive for further development of shadow banking Extremely high capital and other requirements may drive banking activity into institutions or financial arrangements that are not regulated as strongly, often referred to as “shadow banks.” This is especially pronounced in EE’s where required credit growth rates to support continued rapid economic growth and social development are much higher compared to advanced economies (AE) 3. There is near universal agreement after the financial crisis that the shadow banking sector is potentially capable of creating massive problems and triggering a future crisis. Therefore, there is much discussion on how to control those institutions and  3  According to Financial Stability Board’s monitoring report on global shadow banking (“Global Shadow Banking Monitoring Report 2012”, page 4, paragraph 5): “After the crisis (2008–2011), the shadow banking system continued to grow although at a slower pace in seventeen jurisdictions (half of them being emerging markets and developing economies undergoing financial deepening) and contracted in the remaining eight jurisdictions”..  BIS central bankers’ speeches  5  types of transactions.