Survey: new rules will hit bank profits

NEW rules forcing banks to hold more capital could permanently depress profits and hit tax revenues and jobs, a survey has found.

Liquidity buffers three times their present size will increase banks’ costs sharply and permanently reduce profit margins, according to the Evolving Bank Regulation study from business and tax consultants KPMG.

The moves will affect government tax revenue, pension fund income and potentially the level of employment in the financial services industry, the report said.

Global chairman of KPMG’s financial services practice, Jeremy Anderson, said: “Banks have recently returned to profitability following two or more years of heavy losses due to the economic crisis.

“But the signs are that regulatory developments will introduce an era of permanently lower profitability.

“The regulatory efforts are designed to ensure that banking is more stable and conservative than before, in order to protect the interests of individual depositors and avoid the risk of national bailouts.

“Banks recognise the challenges – but the scale of regulatory reform is daunting. Lower profits are recognized as one potential outcome.”

European and US banks face the greatest challenges in the next two years, while banks in the Asia Pacific region will have to deal with considerably less pressure, the report said.

Partner in KPMG’s financial regulation practice, Giles Williams, said: “Despite the language coming out of the G20 around creating level playing fields, the reality may well be different. One thing though is for sure - banks have a major task to deal with the changes and are already channelling considerable time and resource into doing so.”

KPMG said the new liquidity rules from the Basel Committee of Banking Supervisors would force companies to hold liquid funds in low risk, low return assets such as government bonds yielding very small returns, further reducing profitability.