Banks are exaggerating the economic effects of the regulations they are likely to face, BIS chief economic advisor Stephen Cecchetti said. The banks' "doomsday scenarios" were based on them assuming "the maximum impact of the maximum change with the minimum behavioural change".
Banks are exaggerating the economic effects of the regulations they are likely to face in coming years, the economist running an international impact study told the Financial Times.
In a pre-emptive blast before the banks launch their own lobbying effort on June 10, Stephen Cecchetti, chief economic adviser to the Bank for International Settlements, said the banks' "doomsday scenarios" were based on them assuming "the maximum impact of the maximum change with the minimum behavioural change".
"They are assuming they're not adjusting their business at all to the regulatory reforms and that the result for the economy will be the worst possible."
Stephen Cecchetti gave three examples of banks over-estimating the likely effects of the new regulations, which are set to be agreed by the end of the year, with gradual implementation expected to start in 2012.
First, he said banks were claiming that new liquidity rules would force them to swap large quantities of high-yielding loans for low-yielding government bonds, which would have an impact on profitability and lending. Instead, he said they could comply with the rules by lengthening the maturity of their liabilities so they better match those of their assets at much lower cost.
Second, he said they assumed investors would demand the same returns on new tranches of equity capital when this equity would make banks more resilient, lowering risk to equity holders and the cost to banks.
And third, he said the warnings of high costs relied on banks' estimates that the new rules would reduce credit growth and economic growth severely
© Financial Times
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