Thursday, June 10, 2010

Banks say reform plan to hit global GDP growth

VIENNA: The regulatory reforms being proposed for banks around the globe could cut 3 percent off economic growth over the next five years in the United States, euro zone and Japan alone, and cost almost 10 million jobs, top banks said on Thursday, June 10.

The Institute of International Finance (IIF), a bank lobby group representing over 400 firms, said a need to hold more capital, pay more taxes and other possible reforms could hit economic growth hard.

Gross domestic product (GDP) in the three regions would fall by 0.6 percentage points annually between 2011 and 2015 and by an annual average of 0.3 percentage points in the 10 years to 2020, the IIF said in a report released at a meeting in Vienna.

"The IIF calls on the participants of the forthcoming G20 Summit and the international regulatory authorities to consider carefully the content, timing and calibration of proposed bank regulatory reforms, mindful of the potential drag on economic activity that could result," said Josef Ackermann, CEO of Deutsche Bank and IIF chairman.

The economic impact would be hardest in the euro zone, where GDP is projected to be 4.3 percent lower by 2015 if reforms are implemented, compared to a base case forecast. U.S. GDP would be curtailed by 2.6 percent and in Japan it would be restricted by 1.9 percent, the IIF said.

Some 9.7 million fewer jobs could be created due to the reforms over the next five years, the report warned.

Banks face new taxes and requirements to hold more and better quality capital and liquidity and other reforms following the worst financial crisis since the 1930s. Banks in the three key areas would need to raise $700 billion of common equity and issue $5.4 trillion of long-term wholesale debt in the next five years to meet the expected new capital and liquidity requirements, the IIF said.


Banks say they recognise change is needed but are resisting some proposals and are concerned about the cumulative impact of a range of measures and want more time to implement change.

"The point of this report is not to argue against regulatory reform," said Peter Sands, chief executive of Standard Chartered and an IIF director.

"But there is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy.

"The challenge is to strike the right balance, to get the maximum benefit for the minimum negative impact."

Banks are getting more vocal about the danger of uncoordinated action ahead of a meeting of G20 leaders in Canada on June 26-27.

Top countries differ on some key topics. G20 finance ministers on Saturday scrapped plans for a universal global bank tax in the face of opposition from Canada, Japan and Brazil, and new capital rules -- dubbed Basel III -- look set to be phased in over a longer time than originally planned.

A need to hold more capital is likely to be passed on to customers, Ackermann said.

Other costs of reform include a reduction in bank credit, a squeeze on margins from higher liquidity requirements, and the impact on earnings from higher taxes.

Other reforms faced by banks include the introduction of "living wills", which the IIF said it supported. - Reuters

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