Basel's Wellink Counters Ackermann on Economic Benefits of Banking Rules
Basel Committee on Banking Supervision Chairman Nout Wellink defended the economic benefits of new banking rules, after Deutsche Bank AG Chief Executive Officer Josef Ackermann said they may result in job losses.
Wellink spoke to hundreds of bankers gathered at Vienna’s Hofburg Palace for a three-day meeting of the Institute of International Finance, which Ackermann chairs.
Bankers are stressing the costs of too much regulation as the Basel Committee prepares to raise the level of capital and liquidity banks should hold, potentially reducing lending available to fuel economic growth. Wellink said the new rules were vital to create a stronger economy.
“More stable, less leveraged banks would raise average ratings, improve the terms on which banks could raise funds, and lower the required return on equity,” Wellink told the bankers. “It is our duty to shareholders, taxpayers and future generations to reflect on the lessons of this crisis to safeguard against something like this happening again.”
Ackermann, in his role as chairman of the institute, yesterday presented a study which said the proposed rules could erase 3.1 percent of gross domestic product in the U.S., the euro region and Japan by 2015.
Banks globally would need to raise about $700 billion of capital and sell a net $5.4 trillion of long-term debt by 2015 to satisfy the new rules, the study estimated.
“There is no question that increased costs to banks of core capital and funding will have to be largely passed along, which inevitably will take a macro-economic toll,” Ackermann said while presenting the report.
That could translate into about 9.7 million fewer jobs created over the five-year period than would otherwise be the case, said the report from the IIF, which represents more than 375 financial companies in more than 70 countries. The euro region would be hit the hardest, the report said.
“We recognize that properly done and globally coordinated, regulatory reform can yield benefits to macroeconomic stability, but in this study we have not tried to quantify these,” Ackermann said.
Wellink, a European Central Bank council member and head of the Dutch central bank, questioned the report.
“It’s not taking into account the benefits, because there are benefits,” Wellink told journalists after his speech. “The impact in the short term is a negative one. And nevertheless we are doing it.”
The 36-year-old Basel committee of central bankers and bank supervisors meets in the Swiss city of Basel and is rewriting international capital and liquidity standards for banks in the wake of the worst financial crisis since the Great Depression.
While the Basel committee hasn’t completed its quantitative impact studies on what the rules might mean for banks globally and the world economy, Wellink said last month that the Dutch central bank’s estimate for the GDP contraction that Basel rules might cause was between 0.5 percent and 1 percent.
Wellink said the new rules will work in the long term. He dismissed British economist John Maynard Keynes’s famous comment that in the long run we are all dead.
“In the long term -- that is what Wellink said -- we all live happily, if we are doing what we should do,” he told journalists.
The proposed rules “will have an impact on the business model of banks,” Wellink said, adding that that’s a point some bankers may not have understood. “Perhaps some of them are too focused on their own business,” he said.
Proposals to raise capital requirements for trading book activities could have a significant impact, he said. “If you make trading book activities more expensive and if you are big in trading then it has an impact on your business model.”
The idea that stricter rules will protect banks in a future crisis “first has to be empirically proven, and so far it isn’t,” UBS AG Chief Executive Officer Oswald Gruebel said at the conference today. “And does more capital save you from bad management? It doesn’t.”
Gruebel said banks might need closer to five years than three to raise the capital that will be required.
“The capital requirements are simply fantastic,” he said. “If you add them up all around the world, then you wonder who’s going to provide all that money that the banks will need.”
Deutsche Bank Chief Risk Officer Hugo Banziger said at the meeting that there’s no urgency for new regulation because the financial system is more stable than before the crisis.
“Why not take the time to have a solid internationally agreed action plan that is implemented maybe a year later?” Banziger said. “If you take unilateral actions, there will be winners and losers and it’s very difficult to undo such unilateral actions at a later point.”
Wellink said the Basel committee may be flexible when it comes to “grandfathering” assets or setting “longer transition periods.”
The bankers visited Vienna’s Spanish Riding School last night to watch its performing stallions. Bankers then dined on Atlantic salmon and veal in the stable courtyard, as ECB President Jean-Claude Trichet addressed them.
Eugen Haltiner, chairman of the Swiss Financial Market Supervisory Authority, told the conference today that the prancing horses had inspired a dream last night, in which regulators were the riders and bankers were the horses.
“The good news is that the only incentives they ask for is a piece of sugar,” Haltiner said.
Bank of New York Mellon Corp. CEO Robert Kelly replied to Haltiner.
“I had almost the same dream,” he said. “But as I recall in the dream, a number of the bankers were complaining that many of the regulators were too heavy and everyone was trying to loosen the straps on the saddles.”
To contact the reporters on this story: Simon Clark in London at email@example.com Aaron Kirchfeld in Frankfurt at firstname.lastname@example.org Elena Logutenkova in Zurich at email@example.com