Bankers hit the Go-Slow alarm on regulatory crackdown

WASHINGTON Sun Oct 10, 2010 2:16pm EDT

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WASHINGTON (Reuters) - A global crackdown on bank oversight could undermine a fragile economic recovery if governments move too fast and fail to cooperate, international bankers warned at a conference on Sunday.

Amid mounting currency tensions and talk of new surcharges on the industry, some of the world's top bankers appealed for a gradual approach to implementing the Basel III accord on capital and other banking reforms.

The bankers expressed fears that individual governments will go beyond the Basel III deal struck last month between finance ministers from 27 countries that will force tougher capital and liquidity requirements on banks by 2019 so they can better withstand economic downturns and financial shocks.

"There are many troubling developments that we are now seeing on regulatory reform," said Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance, an industry group.

Ackermann and fellow IIF leaders criticized talk that governments might impose surcharges based on banks' size requiring the largest of them to hold more capital than already called for in the Basel agreement.

"The focus should not be on penalizing firms just because they are big," Ackermann said. "Interconnectedness is at least as important, as we learned with the collapse of Lehman Brothers."

He also emphasized a concern bankers at the meeting have been sounding all weekend -- governments should not seek to accelerate the 2019 deadline for fully implementing the new reforms.

"It is very important that the official authorities ensure that the Basel implementing timetable is fully respected," Ackermann said.

BANKERS DESCEND ON WASHINGTON

The IIF held its annual meeting here this weekend alongside the fall meetings of the International Monetary Fund and the World Bank, mixing thousands of gray-suited bankers with the usual throngs of weekend tourists on Washington's streets.

At the meeting, regulators from many countries have pushed back against bankers' concerns, arguing they are overstated.

"Banks have many ways they can adjust their business models to meet the new standards as they are phased in," William Dudley, the head of the Federal Reserve Bank of New York, said on Sunday. "Many of these changes can occur without any risk of disruption to the flow of credit to households and business."

Bankers and regulators at the IIF annual meeting have found common cause, however, on the notion that if new bank rules and capital reforms are not coordinated internationally, then they will have less impact and could create opportunities for mischief or economically risky behavior in countries with lax regulatory environments.

Ever since the 2007-2009 financial crisis, regulators worldwide have moved to tighten oversight of big banks, which have resisted U.S. and European Union reforms, even as many banks have edged toward more conservative business models.

While acknowledging a need for changes to help prevent a recurrence of the crisis and the recession that followed, the banks have sought to protect their profitability and growth from costly new rules and limits on their activities.

SANDS WARNS ON TOO MUCH TOO SOON

Hitting banks too hard and too fast on Basel III could weaken the economy, said Peter Sands, group chief executive of UK financial group Standard Chartered.

"We do have an array of concerns around uncoordinated actions and fragmentation," Sands said, suggesting that original assessments of the economic impact of Basel III could worsen if national governments accelerate its implementation unevenly or tack on additional measures.

In July, the IIF put out a report stating that the Basel framework could reduce economic growth by 3 percent of Gross Domestic Product through 2015.

The new Basel rules will force banks to hold top-quality capital equal to 7 percent of their risk-bearing assets, more than triple than current standards, so they can better withstand economic downturns and financial shocks.

Banks will have until 2015 to meet the minimum core Tier 1 capital requirement, which consists of shares and retained earnings worth at least 4.5 percent of assets. An additional 2.5 percent "capital conservation buffer" will have to be in place by 2019.

Leaders from the Group of 20 developed and emerging nations are set to endorse Basel III when they meet in Seoul in November. Implementation will be left to each country.

IIF board member William Rhodes said that beyond new capital and liquidity requirements governments need to coordinate on other issues impacting financial markets.

"The failure of accounting standard-setters to achieve demonstrated progress toward convergence in key areas … is a matter of major concern," he said. "It's very difficult to have regulatory reform if you don't have accounting reform along with it."

(Reporting by Dave Clarke and Kevin Drawbaugh, Additional reporting by Kristina Cooke, Editing by Stella Dawson)

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