G-20 reforms may dent bank profits, shares

Khaleej Times - 22 September, 2009

Global leaders meeting this week will seek to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of top-tier banks from Goldman Sachs Group Inc. to Barclays Plc.

US President Barack Obama and his counterparts from the Group of 20 most powerful economies are to convene in the US city of Pittsburgh on September 24 and 25 to cement a plan forcing banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded.

Restraining bankers’ pay and narrowing imbalances in trade and savings will also feature on the agenda, as officials try to reach an accord to prevent a relapse of the worst financial crisis since the Great Depression and ensure a sustained recovery. Their efforts would amplify steps that the UAE government has already taken to buttress banks in this country.

In October, the government guaranteed all bank deposits and inter-bank lending, and in February the Ministry of Finance allowed banks to convert long-term government deposits into so-called Tier-2 capital. A new law is in the works that would enable UAE banks to apply for government guarantees of new bonds. However, the UAE government has recently slowed some reforms to give banks more time to comply. At the end of August, for example, the Central Bank lowered the minimum level of Tier-1 capital to 7 per cent of total assets by the end of this month. Before this change, the minimum was to have been 11 per cent. By limiting the scope of banks to invest and trade, the Group of 20 governments may check this year’s 22 per cent gain in the Standard & Poor’s 500 Financial Index. That may be a price they’re willing to pay to prevent a repeat of the risk-taking that sparked the year-ago collapse of Lehman Brothers Holdings Inc., a worldwide recession and taxpayer-funded bank rescues.“Regulation will make banks less profitable by increasing the cost of doing business,” said Andrew Clare, a professor at Cass Business School in London and a former Bank of England official.

“If banks are going to benefit from taxpayer largesse then they need to act in a way that doesn’t hurt taxpayers or the economy.”The Group of 20, or G-20, summit will debate how to drive the economic recovery, avoid protectionism, improve accountancy and revamp governance of the International Monetary Fund.

The leaders will also try to devise a framework to generate a more balanced world economy through increases in US savings, European investment and Chinese domestic demand.G-20 officials travel to the former steel-making centre of Pittsburgh amid voter disquiet after governments used public money to bail out banks only to see many of them quickly return to profit and resume setting aside billions of dollars for executive bonuses.

Also under consideration are steps requiring banks to augment their capital buffers to better account for risk, retain more earnings and cap borrowings as a percentage of total assets. Such a crackdown could reduce profitability by a third at Goldman, Barclays and Deutsche Bank AG’s investment bank, according to a September 9 report from analysts at JPMorgan Chase & Co.

Spokespeople for Goldman, Deutsche Bank and Barclays declined to comment.Investors might suffer if financial companies had to issue more shares, said Charles Goodhart, a former Bank of England official and now a professor at the London School of Economics.“Banks will have to raise more capital by issuing more equity so existing stocks will generally go down,” Goodhart said.

The IMF estimated in April that US and European banks would need $ 875 billion in extra capital.The risk for politicians trying to persuade voters they haven’t let bankers off the hook is that the financial industry will eventually find a way around the revised regulations.“We aren’t doing anything significant so far, and the banks are pushing back,” said Nobel laureate Joseph Stiglitz, a professor at Columbia University in New York City. “The leaders of the G-20 will make some small steps forward, given the power of the banks.... Any step forward is a move in the right direction.”