Financial Regulatory Forum

Bank reform may have $220 billion global capital hit – analysts

By Reuters Staff
February 17, 2010

LONDON, Feb 17 (Reuters) – Top global banks will need an extra $221 billion of capital and see annual profits slump by $110 billion if all proposed regulations to reform the industry are brought in, leading analysts said on Wednesday.

If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 percent from 13.3 percent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned.

“The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy,” Nick O’Donohue, head of research at JPMorgan, said in a research note.

The capital needs of banks would be $221 billion higher in the extreme event that all the reforms were brought in.

British banks alone would need $91 billion, other European banks would need $86 billion and U.S. banks would need $44 billion, JPMorgan estimated.

The most impacted banks could be Britain’s part-nationalised Royal Bank of Scotland and Lloyds, it said.

Pretax profits among the global banks would be cut by $110 billion. Net income in 2011 would more than halve to $74 billion, JPMorgan forecast.

G20 countries had been coordinating efforts to create a strong banking landscape, but the United States and other countries have also put forward separate proposals.

Among the plans are increasing capital and liquidity requirements; the possible separation of retail and investment banking activities; caps on size and potential levies on systemically important institutions.

Banks could end up passing the cost on to customers through higher prices.

“In order to return to similar levels of profitability as per current forecasts, we estimate that pricing on all products (retail banking, commercial banking and investment banking) would have to go up by 33 percent,” O’Donohoe said. (Reporting by Steve Slater; Editing by Rupert Winchester) ((steve.slater@reuters.com; +44 207 542 4367; Reuters Messaging: steve.slater.reuters.com@reuters.net))

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