21 May 2012

FN: Fund chiefs say bank rules will cause economic winter

Martin Gilbert, chief executive of Aberdeen Asset Management, said the Basel III banking regulations will have a “massive effect” on the markets and the economy as a whole. He said: “All I see is the investment banking industry and the banking industry contracting, which takes huge amounts of liquidity out of our market”.

Gilbert was speaking at a Financial News roundtable discussion last week. He and other senior members of Europe’s asset management industry, said the economic impact of regulatory reforms – of which they counted 57 globally – would have a deleterious impact on society that has not been allowed for, would happen soon and might never be reversed.

Bankers have warned that forcing banks to take less risk will impede economic growth, but their vested interest in saying so has led to their views largely being discounted. But asset managers’ views on banking rules are more objective.

The European Commission’s impact assessment on the Capital Requirements Directive IV, which will implement Basel III in the European Union, said that in the worst case scenario GDP would contract by 0.1 per cent a year. CRD IV is still being negotiated – talks moved forward last week when the UK accepted a compromise. But liquidity is already being drawn in.

Mark Garvin, chairman of JP Morgan Europe, said: “The impact of the repricing of risk in the banking sector that will happen as a result of Basel III, and the impact that will have on liquidity, will be felt much sooner than expected, because banks will more or less rush to try to meet these rules as quickly as possible”.

The tight regulatory framework now being set up could last a long time, according to Garvin. He said: “The last time we had anything like this wave of regulation was in the 1930s, and it lasted well into the 1980s. I am not so sure it will be just, say, 15 years before there is a clamour for deregulation: this will endure for quite some time. There are things that we have grown up to assume as being a given, like free intra-day liquidity, that will, in my view, have to be reviewed. The world will be very different. The intention is to make it safer, of course, but there is a price to pay for that.”

The European Commission and Bank for International Settlements, responsible for Basel III, did not return calls inviting comment.

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