Business | Banking

G20's financial revamp will take toll on banks

But little is changing as bankers fight to keep the status quo

  • By Bloomberg
  • Published: 22:34 September 21, 2009
  • Gulf News

New York: Global leaders meet this week seeking to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of banks from Goldman Sachs Group Inc to Barclays Plc.

US President Barack Obama and his Group of 20 counterparts convene on September 24-25 to cement a plan to force 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 hammer out an accord to prevent a repeat of the worst crisis since the Great Depression.

By limiting the scope of banks to invest and trade, 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 collapse of Lehman Brothers Holdings Inc a year ago, a worldwide recession and bank rescues.

"Regulation will make banks less profitable by increasing the cost of doing business," said Andrew Clare, a professor at Cass Business School 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 summit, which will also be attended by UK Prime Minister Gordon Brown, French President Nicolas Sarkozy and Chin-ese President Hu Jintao, will also debate how to drive the economic recovery, avoid protectionism, improve accountancy and revamp governance of the International Monetary Fund. The officials will also try to devise a framework to generate a more balanced world economy through greater US savings, European investment and Chinese domestic-demand.

Leaders travel to 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 for bonuses.

Under consideration: forcing banks to augment their capital buffers to better account for risk, retain more earnings and satisfy a leverage ratio, which measures equity as a proportion of total holdings. They may also consider a proposal to tie pay to capital levels.

"There has been a culture that rewards short-term thinking, that used leverage to take exorbitant risks that were unsustainable for the system as a whole," Obama said in a September 14 interview. "That's the culture I think that we've got to reverse." The crackdown could lower profitability by a third at Goldman, Barclays and Deutsche Bank AG's investment bank, JPMorgan Chase & Co analysts said.

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