Basel III Output Floor Cuts Bank Risk-Taking During Economic Expansions

The Bank of England has released a study on the impact of the Basel III output floor on UK banking. The assessment finds that the rule helps curb banks from setting risk-weighted assets too low during economic expansions, reducing the cyclicality of capital requirements and containing surges in the credit-to-GDP ratio.

The output floor limits mortgage lending growth while amplifying corporate lending, with mortgage effects dominating in aggregate lending outcomes. This moderates the impact of macroprudential policies on the banking system, framing the output floor as a stabilizing tool rather than just a technical capital rule.

According to the Bank of England's model, the output floor counteracts downward pressure on modelled risk-weighted assets during economic expansions, reducing cyclicality and mitigating increases in the credit-to-GDP ratio. This supports the objectives of the macroprudential authority and underscores the importance of regulatory constraints in maintaining financial stability.