Regulatory reforms suspected of dragging down economic growth
Regulatory reforms stemming from the 2008 financial crisis will add to the headwinds of an already weak global economy, according to the Institute of International Finance.
While some of the regulation is needed and sensible, tighter rules and the sheer pace of reform brings its own risks, said IIF, a global association representing more than 440 financial services firms.
This study suggests the impact could total 3.2% of GDP over the next five years for the United States, the eurozone, Japan, the United Kingdom and Switzerland. IIF said 7.5 million fewer jobs could be created globally as the result of new financial regulations.
The Securities and Exchange Commission is also seeking public comment on whether or not regulations are too stringent for growing businesses. The SEC said it will analyze rules that may be "outmoded, ineffective or excessively burdensome, and modify, streamline or repeal them." Public comments should be received by Oct. 6, 2011.
Meanwhile, some changes in the regulatory environment have already occurred, including increased capital levels, overhauled risk management and governance, and significantly reinforced liquidity management.
Still, the new regulatory environment likely will mean slower growth in key economies around the world, the association said.
"The sheer scale and pace of reform brings its own risks," said Peter Sands, chairman of the IIF special committee on effective regulation and group chief executive at Standard Chartered. "The economic costs of the transition to a new financial regulatory regime are uncertain, but significant, and as the IIF study shows, there is an acute danger that the pursuit of financial stability imposes too great a cost on economic growth and job creation at a fragile time for the world economy.”
The study includes a series of scenarios in determining the impact of financial regulatory measures.
It estimated that all the measures combined will significantly boost the capital needs of banks relative to a base scenario — adding $1.3 trillion in capital requirements for banks in the leading industrial economies by 2015, according to the central scenario. This could push bank lending rates up by more than 3.5 percentage points, on average, for the next five years.
The negative economic effects would likely fade in 2016, but the key effects of financial regulations on the global economy come at a time when it is least able to handle it, IIF said.
"The necessity of financial sector reform is unquestionable. However, it is essential to find the right balance in this process, especially at a time of pronounced economic weakness," said IIF Managing Director Charles Dallara. "We have to recognize that the economic costs of transitioning to a new financial regulatory regime have been significant and further substantial costs are likely."
Deleveraging was essential following the bubble period leading up to this crisis, but he questions whether further deleveraging is really necessary.
"It is plausible that the short-term effects of banking reform measures are thwarting much of the monetary policy easing," Dallara said.
Aggregate bank credit to the private sector in the United States and the eurozone fell by 0.5% through June.
The IFF said lending to U.S. households contracted by 7% from June 2010 through June 2011. Lending to small businesses in Europe also declined during the same time period.
The study looks at three different scenarios, a "core reform" and two variants — a "benign" scenario that considers an environment similar to what existed in 2007 and an "accelerated" scenario where regulations programmed to take place by 2018-19 actually take place far more quickly.
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