Banks suffer headache of reform plans

THE SLEW of banking reforms being mooted by world leaders could lead to damaging credit rating downgrades for US banks and force their European counterparts to find €83bn (£72bn) of extra capital by 2012, two leading teams of analysts warned yesterday.

Barclays Capital analysts Jonathan Glionna and Miguel Crivelli said US banks Citigroup, Bank of America, Goldman Sachs and Morgan Stanley would be affected most severely by the combination of the Financial Reform Bill, the Basel III banking regulations, the so-called Financial Crisis Responsibility Fee and President Obama’s recent proposals for limiting the size and scope of banks.

The BarCap analysts predict that all four will be hit to a significant degree by the new proposals, while Citi would suffer most by having to shell out $2.1bn a year for the new banking levy.
They added that if “resolution authority” – the ability to put large banks into receivership – is passed as law in the US, the new reforms could lead to ratings agency downgrades for banks currently considered “safe” as they are likely candidates for systemic support.

Morgan Stanley analyst Huw van Steenis also added his voice to the debate yesterday with a note warning that European banks could require a staggering €83bn of extra capital by 2012 to comply with the Basel Committee’s proposals on capital and liquidity.

He said the plans are likely to have a knock-on effect on lending constraints, with predictions for loan growth at European banks already languishing at less than 1 per cent for this year. “We think Basel III and US proposals could mean – unless amended – that corporates face a higher cost of credit and need to take on more liquidity risk, as the banks are asked to shed risk,” van Steenis wrote.