Bank officials: Regulatory reform could have negative impact on growth, jobs if not done right

Banks warn regulatory reform could impact growth

VIENNA — Regulatory reforms for banks are generally moving in the right direction but could negatively impact growth and job creation, members of the Institute of International Finance said Thursday.

In Brussels, the European Banking Federation issued a similar warning, claiming that new global rules forcing banks to put aside more capital could keep the eurozone economy in or close to recession through 2014.

The federation said its analysis of proposed new Basel III banking standards would limit eurozone banks’ credit growth and profits, hurt the economy and prevent the creation of up to 5 million jobs in the 16 nations that use the euro.

In the wake of the economic crisis that sent the global economy into recession, the international community has been considering tougher rules for financial institutions. Among the measures currently under consideration are stricter capital and liquidity requirements.

Members of the Institute of International Finance, currently meeting in Vienna, said it was important that regulatory reforms are balanced, globally coordinated and not implemented too quickly to avoid thwarting recovery.

“Let me underscore that we consider the direction of regulatory reform to be broadly right,” said Josef Ackermann, the CEO of Deutsche Bank AG who heads global association of bankers’ board of directors.

But he added: “It will be self-defeating, if it undermines the still fragile recovery.”

Ackermann also warned that higher costs for banks to raise capital filter down to their customers and in turn influence the scale of credit growth in the economy.

“Some proposed measures may require banks to actually shed assets, which would reduce the volume of credit they can provide to the economy,” Ackermann said.

In making their points at a news conference in Vienna’s historic Hofburg, Ackermann and other officials referenced a new Institute of International Finance report that, taking the proposed Basel III global banking rules into consideration, projects GDP levels in the United States, the euro region and Japan to be 3.1 percent lower than it would otherwise be by 2015.

As a result, under reasonable assumptions, some 9.7 million fewer jobs would be created over this five-year period than would otherwise be the case, said Peter Sands, group chief executive of Standard Chartered PLC.

“What we’re talking about is headwinds that result in slower economic growth and thus slower job creation,” Sands said. “There is a price for making the banking system safer and more stable and that price will inevitably be borne by the real economy.”

Ackermann — speaking on behalf of the IIF — said the bankers are not in favor of a transaction tax. While he said that, “in principle,” he was in favor of the disclosure of so-called stress tests of European banks, he warned it could also be “very, very dangerous” if no backstop facilities are in place.

He also said it was important for banks to be as transparent as possible about their balance sheets and exposure in order to assure markets and quell a certain “uneasiness.”

“It is very clear that the stability and soundness of the banking system is much higher than when the crisis started,” Ackermann said.

Jean-Claude Trichet, president of the European Central Bank, acknowledged the IIF’s report but recalled how recent turbulence showed weaknesses in the system.

“If I may, you need resilience in the medium and long term,” Trichet told the bankers gathered for dinner at the Austrian capital’s Spanish Riding School.

“We have to find the appropriate way to be sure that we are in a resilient state in the permanent regime … of global finance,” he added.

In Brussels, the European Banking Federation said the Basel rules would force banks to increase lending costs to eurozone households and businesses by nearly 1 percent on average.

The rules are intended to increase banks’ ability to weather future storms by setting new standards — and likely higher levels — for how much capital they must set aside to counter risks. They also would hold back banks from relying heavily on short-term lending from markets.

European banks are warning these moves would impose high costs on them which they may have to pass on to customers in the form of higher interest rates. They say it could curtail lending, which already is depressed as banks become more cautious after the recent financial crisis and subsequent recession.

“Restraint imposed on banks is sufficiently severe to keep the economy in or close to recession through 2014,” the banks say in the IIF report.

European companies rely far more on banks for finance than American companies which also depend selling bonds.

The banks say their analysis doesn’t include the full effects of proposed bank levies — such as a yearly resolution fee to raise €5 billion yearly that would pay the costs of unwinding troubled banks.

Some European countries also are suggesting additional bank fees to pay the costs of future bailouts.

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AP business writer Aoife White contributed to this report from Brussels.