The central bank has warned that macro-regulation proposals under the new Basel III bank rules could hit economic growth, although not as bad as some banks fear.

According to RBA governor Glenn Stevens, the rules to lift capital and lower leverage among the world's banks will potentially increase the cost of borrowing as banks attempt to cover their own elevated expenses.

Although the Basel Committee on Banking Supervision's proposals are intended to boost stability in the global banking system, one concern is that greater intermediation costs will impact economic expansion.

"The conclusion most people are reaching is that economic activity will, to some extent and over some horizon, be lower than otherwise," Mr Stevens said.

"The question is, by how much and for how long?"

The RBA governor said macroeconomic modelling was likely to produce "moderate but nonetheless non-zero effects on economic activity" over an adjustment period of several years, while noting that some banks feared the economic impact would be much worse.

"This is usually because they find that credit to the private sector must be reduced in order to meet the various standards, particularly liquidity standards, because it is assumed there will be quantity limits on the availability of funding in the form necessary."

"It is further assumed that a mechanical relationship between credit and GDP exists, which in turn results in big adverse impacts on GDP."

Mr Stevens, however, said people should be cautious of the assumption of a mechanical relationship between credit and GDP, stressing that the steady increase in leverage in past years may not contributed much to growth.

"Some would argue that its biggest effects were to help asset values rise, and to increase risk in the banking system, without doing all that much for growth and certainly not much for the sustainability of growth in major countries," Mr Stevens said.

"Some gradual decline in the ratio of credit to GDP over a number of years, relative to some baseline, without large scale losses in output may be difficult to achieve, but I don't think we should assume it is impossible."

The Basell Committee is proposing tougher capital and liquidity requirements for the global banking system to boost stability.
Banks would be required to set aside an extra 2 per cent of capital when national authorities believe that there is excess credit growth.

On present capital levels, this could force them to build a "counter-cyclical" buffer of an additional $25 billion to $30bn.

The Australian Bankers Association this week cautioned that the changes could influence the readiness of banks to lend, and also the price at which they were able to provide financing.

Mr Stevens said yesterday that debtors should foresee costs to ascend if banks were forced to hold more capital.

"Put simply, the customers of banks around the world, and especially of large, internationally active banks, will generally be paying more for intermediation services, in the form of higher spreads between rates paid by banks and rates charged by them," Mr Stevens said.

"The reason is that capital is not free and it typically costs more than debt."

However, he said the reforms also had the potential to produce a global financial system that was more stable and less likely to be a source of adverse shocks to the global economy in future.

"So we have a cost-benefit calculation to make," Mr Stevens said.

"Quantifying all this is very difficult, but then that is often the case when deciding policies."