JPMorgan Chase & Co, Wells Fargo & Co and Fifth Third Bancorp executives told US regulators last week that plans to bolster banks’ liquidity are based on the wrong assumptions and risk unintended consequences.
The three spoke at a private meeting in Washington called by the US Federal Reserve to discuss the impact of rules on bank capital and liquidity being drafted by the Committee on Banking Supervision in Basel, Switzerland. None of the representatives from the Fed and four other regulatory agencies present defended the Basel plans, according to two participants who spoke on condition of anonymity.
The complaints voiced by the US lenders are part of a campaign targeting the Basel committee, which the Group of 20 leaders asked last April to produce rules on how much cash and capital banks must keep on hand following the worst financial crisis in 70 years. Lobbyists for Deutsche Bank AG, HSBC Holdings Plc and more than 150 other European financial services companies are also pushing their countries’ regulators and politicians to soften the rules and give them extra time for implementation. The rules may cost 13 of the largest banks $20 billion in annual earnings, according to JPMorgan analysts.
“There will be a lot of horse-trading going on as these rules are calibrated,” said Frederick Cannon, chief equity strategist at New York-based Keefe, Bruyette & Woods, a research firm that specializes in financial companies. “Liquidity rules are already coming under fire. Capital rules are less developed, but even there there’s a push from different sides on what counts as capital.”
Banks, lobbyists and others have until tomorrow to submit comments to the committee, part of the Basel-based Bank for International Settlements. They have until the end of this month to tell their regulators how much the proposals will cost. The panel, made up of bank supervisors and central bankers from 27 countries and territories, will draft rules by the end of the year for lawmakers to implement by late 2012. The committee first published regulations in 1988 and revised them in 2004.
“If they go too far, they may undermine firms’ ability to carry out viable activities that serve clients, which will hold back economic recovery and future growth,” said Rob McIvor, a spokesman for the Association for Financial Markets Europe, a London-based group that lobbies on behalf of more than 150 finance firms including Deutsche Bank, HSBC and JPMorgan.
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Banks are using arguments like that to resist regulation, according to Barbara Ridpath, chief executive officer of the International Centre for Financial Regulation in London, a research organization funded in part by the UK government.
“That’s just a veiled threat,” Ridpath said. “You are going to make it too expensive for us to lend, so it is going to be your fault when there’s no economic growth. The truth, who knows? Who’s done the studies? Who has any real concept of what the real impact is of the price of credit and GDP growth?”
Representatives from the Federal Deposit Insurance Corp, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Reserve Bank of New York were all present at the Washington meeting, the participants said. Wells Fargo Treasurer Paul Ackerman and Fifth Third Treasurer Mahesh Sankaran were among those who spoke, according to the participants. Spokesmen for Cincinnati-based Fifth Third and Wells Fargo in San Francisco declined to comment.
The US banks argue that the liquidity rules could force lenders around the world to sell $6 trillion of new debt to meet the requirements. Under the rules, banks would have to maintain a “net stable funding ratio” of 100 per cent, meaning they would need an amount of longer-term loans or deposits equal to their financing needs for 12 months, including off-balance-sheet commitments and anticipated securitizations. This would require that some short-term funding be replaced by longer-term debt.
Higher capital requirements and a stricter definition of capital may reduce lenders’ return on equity to 12.9 per cent from the 13.8 per cent estimated for 2012, according to UBS AG analysts. Britain’s Royal Bank of Scotland Group Plc, Germany’s Commerzbank AG and France’s Credit Agricole SA are among seven European lenders that may need to raise ¤60 billion ($82 billion) to comply with Basel’s capital rules, JPMorgan analyst Kian Abouhossein said in February.
“Stringent capital requirements may hamper banks from functioning fully as lenders to the economy,” said Robert Priester, head of regulatory policy at the Brussels-based European Banking Federation, which lobbies for 5,000 firms, including Barclays in London. “Some banking businesses should reinforce their capital, but again, it is not a panacea and needs to be handled with care.”
While the Basel committee hasn’t yet set revised figures for how much capital banks should hold, its December proposal narrowed the definition of what would count as high-quality capital to buffer bank losses.
The definition would exclude deferred tax assets, past losses that European lenders in particular use to offset tax charges in future years. Deutsche Bank’s fourth-quarter profit was helped by a ¤554 million benefit linked to the recognition of deferred tax assets. The definition also would exclude mortgage-servicing rights, which banks in the US want to keep. Those assets are present only on their balance sheets.
The US banks oppose the proposed inclusion of all derivatives when adding up assets used to calculate whether a bank meets the minimum capital ratio. US accounting rules allow banks to net their contracts, while European banks already include the gross value of their derivatives because they report under international accounting standards.
Lenders such as Deutsche Bank are disturbed by the possibility that the commission will set a fixed limit on leverage, or how much a bank can borrow. The ratio would force banks in Europe to raise additional capital because of the same differences in accounting that make their assets look larger than those of their US counterparts.
Some bankers say higher capital requirements are inevitable. They’re asking for additional time to implement the rules and seeking to water down or strike out additional restrictions, such as leverage limits.
“I fully support the goal of strengthening the capital base of the financial system,” Deutsche Bank CEO Josef Ackermann said at a March 17 conference in Frankfurt. “The leverage ratio being considered has grave conceptual weaknesses.”
Societe Generale SA’s deputy CEO, Severin Cabannes, met with investors in Edinburgh last month to tell them regulators are likely to soften the rules to avoid stifling growth, according to two investors who met with him.
The Basel committee has proposed that bank core capital, held to absorb losses, should exclude securities that require lenders to make payments to third parties. This would disallow the hybrid capital instruments Deutsche Bank and other European lenders use. The Frankfurt-based bank is pushing for the rules to be introduced gradually.
“Longer transition periods, grandfathering and gradual implementation seem essential to cushion the macroeconomic costs of a transition to the stricter regime,” Ackermann said.
Banks say inconsistent implementation of Basel rules may create an uneven playing field. European Union lenders began applying the last round of Basel rules in 2008, known as Basel II, a decade after work started on the rules. US banks haven’t even implemented that benchmark.
“Changes should be gradually phased in over several years and must be internationally coordinated,” Stephen Green, chairman of London-based HSBC, said in an e-mail.
After receiving comments from banks, lobbyists and regulators, the Basel committee will prepare a Quantitative Impact Study, setting out the effect of the regulations. The committee will publish some of the responses it receives on its Web site starting next week, according to a BIS spokeswoman. The BIS hasn’t set a date for issuing the quantitative assessment.
The study will be the “first time the world at large understands the severity of what has been proposed,” Simon Gleeson, a regulatory lawyer and partner at London-based Clifford Chance LLP, said in an interview. “At that point, the major banks will go to their governments. They won’t feel that they have any lines of defense left at Basel.”