G20 sets up long struggle over bank capital rules

WASHINGTON (Reuters) - The long fight over bank capital standards can begin now that the G20 speeches are done, with U.S. and French industry lobbyists already digging in.

In a struggle that will unfold at least through 2012, bankers will grapple with national authorities working to implement G20 goals set last week by leaders in Pittsburgh.

EU banks will have a tougher time of it than their U.S. peers in meeting and managing new rules on capital, liquidity and leverage, said Morgan Stanley analysts on Monday.

"We believe U.S. large cap banks are far along in the restructuring of their balance sheets for the new regulatory environment outlined at G20," said the report from Morgan Stanley banking analysts Betsy Graseck and Huw van Steenis.

"The U.S. banks are currently better capitalized than their European peers," they said.

The report's top large-cap U.S. stock picks included Bank of America, JPMorgan Chase, Bank of New York Mellon, Wells Fargo and PNC Financial.

The French Banking Federation said on Monday that the G20's goals should be weighed against their economic costs.

Similarly, the Securities Industry and Financial Markets Association, a U.S. financial services industry lobbying group, warned broadly that proposed reforms "could negatively impact investors, capital flows, and economic growth."

World leaders are trying to prevent a repeat of the crisis that last year drove the world financial system to the brink of collapse. The Group of 20's final summit communique on Friday urged tighter regulation of banks and capital markets, not only targeting balance sheets, but also banker pay and bonuses.

But the G20 -- a coalition of rich and developing nations boasting the world's biggest economies -- has no lawmaking power, and demanding and doing are two different things.

"Anybody can make a statement, the real issue is whether they can really do it," said Paul Miller, a banking industry analyst with investment firm FBR Capital Markets.

NATIONAL IMPLEMENTATION

Implementing G20 objectives will be up to national leaders, legislators and regulators, with legions of lobbyists working tirelessly to protect banks' profit margins from erosion.

Summits like Pittsburgh "are at best forums for discussion. They don't really come up with anything binding," said Espen Eckbo, director of the Center for Corporate Governance at the Tuck School of Business at Dartmouth College.

"When it comes to banking regulations, the decisive factors are going to be the local communities and the banking sector."

The G20 called for defining higher capital standards by the end of 2010 and implementing them by the end of 2012, while also saying the standards could be phased in over time to prevent them from working to prolong the recession.

G20 finance ministers are scheduled to meet again in Scotland in early November.

Eventually, given the gravity of the crisis, new standards look inevitable. The real question is how high they will be, with some analysts expecting a long-term drag on bank stocks and a restructuring of some banks' core business models.

"We will over time be moving to a position of stronger capital ratios with higher capital requirements in relation to activities incorporating market risk, said Ian Gordon, industry analyst at Exane BNP Paribas.

"The overall effect will be higher capital ratios than we've historically seen, hence lower returns on equity."

Much will depend, however, on the industry's ability to mute the G20 goals through influencing implementation.

The Morgan Stanley analysts said, "Some sector commentators are looking for materially tougher standards that reduce (returns on equity) to just above cost of capital. We do not expect this ... Rather, we expect pragmatism from regulators."

(Additional reporting by Gernot Heller in Pittsburgh, Joe Rauch in New York, Karey Wutkowski in Washington and Huw Jones in London; Editing by Andrea Ricci)