European banks step up battle against major new reforms

By Huw Jones

LONDON (Reuters) – Tougher rules introduced after the financial crisis have made it harder for banks to support the economy, a European banking lobby said on Thursday in a study they hope will stem the flow of new regulation.

Banks have been forced to hold far more capital since many of them were bailed out by taxpayers during the 2007-09 financial crisis.

The study by the Association for Financial Markets in Europe (AFME) and consultants PwC looked at 13 global banks that collectively represent 70 percent of the world’s capital market activity.

“While the benefits from the post-crisis regulatory framework are clear, now is the right moment to examine how this framework has influenced banks’ capital markets activities,” AFME Chief Executive Simon Lewis said in a statement.

“Our study finds that since the crisis, there has been a significant decline in banks’ global capital markets assets with regulation being by far the largest single driver of these changes.”

Regulators and central bankers have repeatedly said tougher rules introduced since the financial crisis have made the financial system safer and have not crimped the flow of credit to the economy.

The annual cost of regulation at the 13 banks totalled $37 billion or 39 percent of total capital markets expenses in 2016, the study found.

Regulation led to a 14 percentage point reduction in capital markets return on equity (ROE), a measure of profitability, between 2010 and 2016, it added.

Banking regulations have contributed to a particularly substantial reduction in banks’ ability to support issuance, trade corporate debt and equity, said Nick Forrest, a PwC director.

“This can ultimately lead to reduced access and higher cost of borrowing for corporate borrowers,” Forrest said.

The study did not assess the impact of regulation introduced after 2016 such as the EU’s MiFID II reform of securities markets, and new banks capital rules agreed by the global Basel Committee last December.

“Taken together with banks’ 2017 capital markets results, this strongly suggests that the trends seen in the study are likely to continue,” the study said.

Regulators should commission further studies on the impact of regulation on banks before making further major rule changes, Lewis said.

Global, U.S. and European regulators are already reviewing rules, but mainly with an eye for tweaks to tackle unintended consequences and ease the burden on smaller lenders, rather than to initiate big rollbacks.

Mark Carney, head of the G20’s Financial Stability Board and Bank of England governor, said last month that focus is now on reviewing existing rules rather than designing new ones.

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