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International waves of regulationThe cost for banks and the economy  4th Risk Management & Compliance ForumGeorge Georgako...
Introduction and Summary    A wide set of international reforms, as well as many nation–specific changes are being introdu...
Key Areas of Regulatory Changes                                                            Regulatory Changes             ...
The Regulatory Agenda Facing Financial Firms                                     CAPITAL                                  ...
Basel III Minimum Capital Ratios and Phase-in Plans                                                       2011 2012   2013...
What Changes Occurred since the Crisis Started? (I)    Many financial institutions across the world have been either liqui...
What Changes Occurred since the Crisis Started? (II)   Supervisors have begun to enforce higher capital and liquidity rati...
How Regulatory Reforms Impact the Economy?Globally Coordinated Reforms    Distance for banks to adjust     National reform...
Costs of Additional Equity and Debt Funding will Define the Impact on the Economy                                    Perce...
The Price to Book Ratios though Indicate Low Appetite for Equity Investment in Banks           5.0           4.0          ...
Regulatory Reforms will Have an Impact on the Real Economy             Impact on banks                           Lower cre...
Estimated Costs for Economies & Banks       Higher lending rates will reduce the level of real GDP by about 3% up to 2015,...
What About the Impact of the international Regulation Reformon Eastern Europe?The impact on the GDP of the CEE between 201...
Benefits of Regulatory Reform   Higher capital and liquidity requirements will lead to a greater degree of shock absorbenc...
Are There Alternatives to Micro-Prudential Regulation?     I expect alternative approaches to the current path of regulato...
Conclusions     Following the financial crisis, regulators have introduced requirements for additional capital and  liquid...
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G.Georgakopoulos International Waves Of Regulation The Cost To The Economy 19 06 2012 Final

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Presentation @ Risk Management Conferece - Athens on 19/6/12. George Georgakopoulos

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G.Georgakopoulos International Waves Of Regulation The Cost To The Economy 19 06 2012 Final

  1. 1. International waves of regulationThe cost for banks and the economy 4th Risk Management & Compliance ForumGeorge GeorgakopoulosExecutive Vice President – BancpostPresident of the BOD – EFG Retail ServicesGeorge.georgakopoulos@bancpost.ro Athens, June 19th 2012
  2. 2. Introduction and Summary A wide set of international reforms, as well as many nation–specific changes are being introduced, aimed at improving the stability of the global financial system. The prevailing regulatory rationale is micro-prudential, attempting to stabilize the financial system through higher capital & liquidity requirements. Banks are four years into what will probably be a decade–long phase of adjustment to tougher regulatory standards. Tougher regulations might increase capital needs , for Euro area banks only, by 700 bn euro, and long–term debt issuance by 300 bn. by 2015. These funding demands will likely lead to an increase in bank lending rates of about 364bps over the next five years. Much of the adjustment to date has occurred through de–leveraging, which has been an impediment for the global economy. Higher lending rates will likely reduce the level of real GDP of the Euro area by about 3% up to 2015, or by about 0.7% per year. CEE economies will be affected more, since they rely heavily on bank financing This would lead to about 2.8 million fewer jobs being created over the next four years. Alternatives to pro-cyclical regulation such as macro-prudential measures, or mitigators such as direct support from governments and central banks to ensure lower cost of funding for banks, and, therefore, more lending, might well come to the forefront of the public policy debate in the near future. 2
  3. 3. Key Areas of Regulatory Changes Regulatory Changes Internationally agreed-on measures Nation-specific measures Capital related measures Liquidity related measures e.g. Romania: • additional capital and liquidity rules • consumer protection• Internationally capital agreed-on measures may include the following: • restriction on credit expansion higher core ratios re-definition of capital changes in risk-weighting capital surcharges 3
  4. 4. The Regulatory Agenda Facing Financial Firms CAPITAL Liquidity New minimum capital levels Liquidity coverage ratio Capital conservation buffer Net stable funding ratio Counter-cyclical buffer Liquid asset definition Revised definition of capital Role of central bank Trading book capital Local restrictions Counterparty credit risk charge Off-balance sheet commitments Contingent capital Treatment of financial institutions Leverage ratio Money market fund regulationSource: IIF “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework” _ Sept 2011 4
  5. 5. Basel III Minimum Capital Ratios and Phase-in Plans 2011 2012 2013 2014 2015 2016 2017 2018 2019 1. Minimum Common Equity 2% 2% 3.50% 4% 4.50% 4.50% 4.50% 4.50% 4.50% Capital Ratio 2. Capital Conservation Buffer 0.625% 1.25% 1.875% 2.5% 3. Total (1+2) 2% 2% 3.5% 4% 4.5% 5.125% 5.75% 6.375% 7% 4. Phase-in of deductions from core Tier 20% 40% 60% 80% 100% 100% 1equity due to capital redefinitions 5. Phase-out of instruments that non longer 10% 20% 30% 40% 50% 60% 70% qualify as non-core Tier 1 or Tier 2 capital Memo: Minimum Tier 1 Capital 4% 4% 4.5% 5.5% 6% 6% 6% 6% 6% Minimum Total Capital 8% 8% 8% 8% 8% 8% 8% 8% 8%Source: BCBS 5
  6. 6. What Changes Occurred since the Crisis Started? (I) Many financial institutions across the world have been either liquidated or merged; whole sectors of the financial industry have disappeared or been reformed; market mechanisms and transparency have improved; and, perhaps most importantly, Industry behavior has been radically changed by the experiences of 2007 – 2008. Among the key changes already registered have been significant efforts by banks to boost capital and liquidity ratios (like Basel II) The crisis has made bank managers themselves far more conservative in their behavior & in the desired structure of their balance sheets. “Fortress balance sheets” have become desirable and attractive to regulators, bank managements and investors 6
  7. 7. What Changes Occurred since the Crisis Started? (II) Supervisors have begun to enforce higher capital and liquidity ratios well ahead of the implementation of globally agreed-on norms. In some cases, this reflects the introduction of new, local specific norms (in Switzerland, where banks were required to raise capital and liquidity ratios in 2008). In the United States, the stress test of early 2009 (otherwise known as the Supervisory Capital Assessment Program, or SCAP ) showed that under an adverse scenario, 10 of the 19 SCAP banks would need to raise a total of $75 billion in capital in order to have the capital buffers that were targeted under the SCAP. In Europe, the publication of the results of the 2011 European Banking Authority (EBA ) stress test exercise revealed that several banks had made substantial efforts to improve their capital position in the first half of the year, largely in anticipation of the exercise itself. Many banks are adjusting as rapidly as possible to new international norms for both capital and liquidity well ahead of their formal timetable introduction. 7
  8. 8. How Regulatory Reforms Impact the Economy?Globally Coordinated Reforms Distance for banks to adjust National reforms Time for implementation Economy’s dependence on banks for credit intermediation Other factors shaping banking health Impact on economy 8
  9. 9. Costs of Additional Equity and Debt Funding will Define the Impact on the Economy Perceived riskiness of banking sector All 3 are likely to work negatively for Cost of Bank Near term Equity Capital supply SE Europe in the Ability of banks to near term deliver on investors’ expectations Increased demand for bank Perceived riskiness debt will increase the Cost of Long- spreads, however the of the region might Term Bank stronger capital ratios will Debt reduce the risk of bank well disadvantage bond-holders SEE banks The Bank of England already announced on June 14th that it is looking to give to banks cheap funding for several years as to ensure bank lending in periods of extended uncertainty. 9
  10. 10. The Price to Book Ratios though Indicate Low Appetite for Equity Investment in Banks 5.0 4.0 3.0 2.0 1.0 0.0 08 09 10 11 8 08 8 9 09 9 0 10 0 1 11 1 2 -0 -0 -0 -0 -1 -1 -1 -1 -1 p- p- p- p- n- n- n- n- ec ec ec ec ar ar ar ar ar Ju Ju Ju Ju Se Se Se Se M M M M M D D D D RZB Unicredit Erste EFG Eurobank Alpha Bank NBG Price to book = Market Capitalization / Tangible Book Tangible Book = Total Equity – Intangibles - Goodwill Source: Bancpost internal estimates; Reuters 10
  11. 11. Regulatory Reforms will Have an Impact on the Real Economy Impact on banks Lower credit supply Higher bankRegulatory lending rates Lower aggregate Change demand Higher private sector borrowing costs Impact on non-bank Higher non-bank credit intermediation lending rates 11
  12. 12. Estimated Costs for Economies & Banks Higher lending rates will reduce the level of real GDP by about 3% up to 2015, or by about 0.7%/ year for the Euro area. This would lead to about 2.8 million fewer jobs being created over the next five years. Change in real GDP & employment By 2015, banks are projected to need -0.6% to raise about 1.8 trillion USD. The impact of reform is to reduce avg. GDP (of the 5 regions) by 0.7 pp / -3.0% year for the next 5 years. This leads to a lower GDP by 3 pp than where it would otherwise be. In 2015, employment impact implies that governments would make a dent for the 17 mil shortfall registered between Q3 ’08 & Q1 ’10. -2,825Sources: International sources and IIF report _ Sept 2011 12
  13. 13. What About the Impact of the international Regulation Reformon Eastern Europe?The impact on the GDP of the CEE between 2011 and 2015 is likely to be higher than the 3% of the Euro area because of:1. Higher cost of equity capital, driven by higher credit risks in the CEE2. Higher cost of debt funding, driven by higher CDS rates3. The reliance on banks as the main financing option in the region4. Local measures in the region which further accentuate slow-down in lending (e.g. regulatory ceilings of indebtedness, regulation on tenors, etc) 13
  14. 14. Benefits of Regulatory Reform Higher capital and liquidity requirements will lead to a greater degree of shock absorbency. Thiswill make the banking system more resilient to costly future financial crisis. One can consider current regulatory changes as an insurance premium in view of future crisis. Higher capital ratios provide insurance to banks against business decisions going wrong, but alsoagainst issues caused by economic volatility. The higher capital and liquidity ratios might convince investors that it is attractive to invest inbanks across the economic cycle since their capital is safer 14
  15. 15. Are There Alternatives to Micro-Prudential Regulation? I expect alternative approaches to the current path of regulatory reform to get stronger support in the future, and specifically measures that do not slow-down lending in the recession or post crisis: • Time varying capital requirements • Higher quality capital • Corrective action targeted at Euro amounts – not capital ratios • Regulation of debt maturity • Regulation of the shadow banking system (ABS funded short term)Source: Hanson, Kahyap and J Stein, A macro-prudential approach to Financial Regulation 15
  16. 16. Conclusions Following the financial crisis, regulators have introduced requirements for additional capital and liquidity – an adjustment process that will last for several more years The key argument in favor is that such regulation is that it will protect the economy in future crises However, it is equally expected that such regulation will impact GDP and employment in the short & medium term, due to the increase in lending rates and contraction of demand The negative impact is likely to be higher in Eastern Europe, since the costs of equity and debt capital will be higher Micro-prudential regulations have been criticized as untimely. Alternative macro-prudential regulations are likely to get more support in the future Central banks and governments are likely to consider the plans of the Bank of England to provide cheap long term funding to banks so that they do extend lending in uncertain times 16

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