VIENNA, June 10 (Reuters) - A regulatory crackdown on banks could cut 3 percent off economic growth over the next five years in the United States, euro zone and Japan and cost almost 10 million jobs, top banks said on Thursday.
The Institute of International Finance (IIF), a bank lobby group representing more than 400 companies, said a need to hold more capital, pay more taxes and other possible reforms could hit economic growth hard.
Gross domestic product (GDP) in the three regions would fall by 0.6 percentage point annually between 2011 and 2015, the IIF said in a report released at a meeting in Vienna.
“The IIF calls on the ... forthcoming G20 Summit and the international regulatory authorities to consider carefully the content, timing and calibration of proposed bank regulatory reforms,” said Josef Ackermann, CEO of Deutsche Bank and IIF chairman.
European Central Bank President Jean-Claude Trichet, who compared the financial crisis to the Gulf of Mexico oil spill, later told the bankers at the meeting that the impact of financial reform was not just about growth, and banks’ main purpose was “to serve the real economy, not the other way round.”
“The recovery should be measured in broader terms than the simple resumption of GDP growth and a return to sustainable fiscal positions,” he told the bankers over dinner in the grandiose stables of Vienna’s Imperial Riding School.
“It means a full restoration of trust in our financial institutions; it requires the healing of wounds inflicted by the irresponsible behaviour of some financial players on our societies and on the real economy,” Trichet said.
Banks face new taxes and requirements to hold more and better-quality capital and liquidity — dubbed Basel III — and other reforms after the financial crisis.
“We find ourselves in a situation eerily reminiscent of the 1930s,” billionaire U.S. investor George Soros said at the conference. “Many governments have to reduce debt under pressure from financial markets. This is liable to push the global economy into a double dip.”
Soros warned that the recent loss of confidence in sovereign debt showed the fragility of the market and that the financial crisis was “far from over.”
He said it left European authorities with a daunting task, juggling short-term needs and what is good for the long term.
The absence of published stress tests by euro zone banks has added to jitters about the sector’s health, but Ackermann said publishing results would be dangerous if support mechanisms were not in place beforehand.
“Disclosure is a good thing; it calms down uncertainty in the market. But it can only happen if backstop facilities are in place and if governments are willing to support banks which have difficulties,” Ackermann said.
The impact of increased regulation will be hardest in the euro zone, where GDP is projected to be 4.3 percent lower by 2015 if reforms are implemented, compared with a base case forecast, the IIF said. U.S. GDP would be curtailed by 2.6 percent and in Japan it would be restricted by 1.9 percent.
Some 9.7 million fewer jobs could be created due to the reforms over the next five years, the report warned.
Banks in the three key areas would need to raise $700 billion of common equity and issue $5.4 trillion of long-term wholesale debt in the next five years to meet the expected new capital and liquidity requirements, the IIF said.
Banks say they recognise change is needed but are resisting some proposals and are concerned about the cumulative impact of a range of measures and want more time to implement change.
“There is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy,” said Peter Sands, chief executive of Standard Chartered and an IIF director.
“The challenge is to strike the right balance, to get the maximum benefit for the minimum negative impact.”
A regulatory source said the IIF study focused only on costs and ignored the benefits that higher bank capital brings, such as a more stable financial system that will be rewarded with higher credit ratings and thus cheaper capital raising.
The Basel Committee has been assessing the impact of Basel III and initial results come out with lower costs than the IIF study and a net overall benefit, the regulatory source said.
Banks are getting more vocal about the danger of uncoordinated action before G20 leaders meet on June 26-27. Trichet urged G20 leaders to stick to their timetable, which foresees Basel III to be introduced in 2012.
Major countries differ on some key topics. G20 finance ministers on Saturday scrapped plans for a universal global bank tax in the face of opposition from Canada, Japan and Brazil, and new capital rules look set to be phased in over a longer period than originally planned.
A need to hold more capital is likely to be passed on to customers, Ackermann said.
Other costs of reform include a reduction in bank credit, a squeeze on margins from higher liquidity requirements, and the impact on earnings from higher taxes.
Other reforms faced by banks include the introduction of “living wills” — plans to dismantle themselves in case of bankruptcy — which the IIF said it supported.
Additional reporting by Edward Taylor in Vienna and Huw Jones in London; Writing by Steve Slater; Editing by Simon Jessop, Will Waterman and Matthew Lewis