Wednesday, February 17, 2010

Doomsday regulation scenario laid out

Original posted in the Financial Times by Patrick Jenkins:

The biggest banks will see their profitability fall by nearly two-thirds next year under a doomsday scenario to be outlined in research published on Wednesday .

Analysts at JPMorgan have calculated that if the full burden of regulatory and political initiatives to crack down on banks’ risks is implemented, it would cut the average return on equity from a projected 13.3 per cent to 5.4 per cent.

The conclusion is a stark illustration of what might happen if all of the proposals mooted by governments in the US, UK and France were put into effect globally at the same time as the overhaul of capital and liquidity standards being engineered by regulators on the Basel Committee on Banking Supervision.

The authors concede that such an extreme scenario, which would also entail the world’s 16 leading banks (excluding JPMorgan itself) having to raise an estimated $221bn, or $14bn apiece on average, is unlikely to occur in practice.

But there are growing concerns in the banking industry that a large number of the proposals will become reality in the coming years.

Up until the UK bonus tax was announced in December, there was an assumption that Basel and the Group of 20 leaders were working in a co-ordinated way.

But over the past month or two, governments’ interventions have complicated the regulatory approach.

In a trio of reports on the future of banks, JPMorgan identifies seven areas in which they are vulnerable to change: a political push to separate retail and investment banking activities; rising capital requirements; the need to hold higher levels of liquid assets; caps on size; accounting changes; potential levies on systemically important institutions; and contingency planning for failure, which could necessitate groups to be structured in a more costly way as strings of local subsidiaries.

Nick O’Donohoe, head of global research at JPMorgan, is convinced that whatever the burden of regulatory change, banks will not absorb the hit, instead passing the cost on to customers in the form of far higher prices.

“In order to return to similar levels of profitability as per current forecasts,” JPMorgan’s report concludes, “we estimate that pricing on all products (retail banking, commercial banking and investment banking) would have to go up by 33 per cent.”

European banks, such as Credit Suisse, Deutsche Bank, Royal Bank of Scotland and Lloyds, will be worst affected, JPMorgan calculates.

1 comment:

Jason W said...

The banks must be broken up to end the current "conflict of interest" they currently create with such wide spreads throughout the market. The growing influence they've had over the past 20 years has done irreparable damage to society world-over. Unfortunately, those who create the reform are pretty ignorant to what needs to be done and will likely only make decisions that make good soundbites at election time.