The Financial Times reports today that 'economic growth in the eurozone, the US and Japan would be cut by 3 per cent between now and 2015 if current proposals to force banks to hold more capital and liquid assets go forward unchanged, the world’s leading banking industry group warned Thursday.
As a result, 9.7m fewer jobs would be created in those areas over the period, according to an impact assessment issued by the Institute for International Finance at a meeting in Vienna.
The industry group is pushing hard for the Basel Committee on Banking Supervision to water down or at least delay implementation of the proposals, which are slated to be voted on later this year.
According to the IIF, the eurozone would feel the largest impact from the new Basel proposals with growth cut 0.9 percentage points per year, resulting in a cumulative reduction in gross domestic product of $920bn or 4.3 per cent by 2015. The US would see a cumulative reduction of 2.6 per cent ($951bn) and Japan would see a 1.9 per cent cut ($130bn). The group did not look at the impact on the UK or Switzerland.
“There is a price for making the banking system safer and more stable, and that price will inevitably be borne by the real economy. The challenge is to strike the right balance, to get the maximum benefit for the minimum negative impact,” said Peter Sands, chief executive of Standard Chartered and chairman of the IIF committee on effective regulation.'
The fears relate to money supply. If banks cannot leverage their equity base, called Core Tier 1 Capital, to lend money (increasing the risk-weighted & assessed assets on their balance sheet) then they shift focus from lending to shrinking their balance sheets.
This is already happening, both in respect of commercial and consumer lending, and Basle III rules will make it worse. At what point will banks also have to write down more of the value of their assets (since many will have dropped in value in the last 2 years)?
What's worrying is if in background The Institute of International Finance (IIF) is genuinely fearful for some of its members, squeezed by the likely need to write down assets anyway, and by the added requirement to get to a equity to asset ratio that is more demanding than currently. It is the resulting solvency concerns that are really very serious.
All this means less investment lending from banks, which in turn means that money supply will continue to be squeezed, and therefore growth is likely to remain subdued until banks' balance sheets are repaired.
Since state spending has run its course, it can no longer afford to continue to prop up GDP growth via employment and other initiatives. We have seen very clearly this last month that governments that do not show a real appetite for reining in their runaway deficits will get hammered by the markets. Their is in effect no choice other than fiscal restraint.
Consumer spending is unlikely to pick up the baton soon, and statistics showing consumers are paying down debt faster than ever, is probably counting banks' cutting down their loan books and defaulters. Of course, whilst interest rates remain historically low no one is in screaming pain, but that would change with any creeping inflationary pressures.
Whether this means that a double dip, takes the form of another fall in GDP in certain countries or prolonged subdued overall economic activity (what commentators are calling a lost economic decade) remains to be seen.
On the positive side the WSJ has reported a Federal Reserve statistic that nonfinancial companies had socked away $1.84 trillion in cash and other liquid assets as of the end of March, up 26% from a year earlier and the largest-ever increase in records going back to 1952. Cash made up about 7% of all company assets, including factories and financial investments, the highest level since 1963.
In today's world, cash is most definitely king. The vogue of leveraged organisations belong to a not-so- distant past. Anything that can reduce operational costs is therefore more attractive than ever. Combine that with the sea-change in consumer and buyer behaviours and the corresponding commercial need to engage with markets quite differently than in the past to sustain and defend a customer base, and you can see why companies are attracted to innovative solutions that improve marketing operational performance and outcomes.
There is undoubtedly money to invest, whether in the form of companies cash reserves, venture capital, or private capital; just not in the things we've always done the way we've always done them.
