Bigger Capital Requirements Could Slow Down Profits

Investors should prepare themselves for smaller profit margins as banks stash away more capital to avoid another global financial crisis, the world's major central bankers cautioned Sunday.

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They also advised central banks around the world that interest rates might need to rise soon to bring inflation under control.

The Bank for International Settlements said new rules for banks to gradually increase their capital cushions would likely result in more predictable and smaller returns.

But the bank, an umbrella organization for the world's major central banks, also said in its annual report that bank managers and shareholders haven't adjusted expectations accordingly.

It said rates might have to be raised because "tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks."

Jaime Caruana, the bank's general manager, said the global financial crisis of 2008-2009 still casts long shadows, but already there are signs of a return to excessive risk-taking.

He warned of threats posed by unsustainable public debt, soaring energy and commodity prices and inflation that is already hitting many countries and threatening others.

"While encouraging investors to take some risk was part of crisis management, there are signs that, in some areas, investors may be going too far again," he said.

Caruana said that while fiscal problems are most visible in heavily indebted eurozone nations like Greece, Ireland and Portugal, other major economies also must be careful and quickly improve their standing to avoid triggering another big global crisis.

Interest rates, he suggested, might need to rise.

"There is a need to normalize monetary policy," Caruana told reporters in Basel. "Globally, real short-term interest rates, already negative, fell further over the past year. Normalizing rates would reduce the incentives to take excessive risk and would support necessary structural and balance-sheet adjustments."

  • Regulators Agree to Slap Extra Capital Charge on Big Banks

The so-called Basel III rules for requiring larger cash buffers are intended to prevent another shock to the global financial system like the one in 2008 when Lehman Brothers collapsed.

Holding more capital would cut into the money that banks can lend and invest but improve their ability to withstand the blow if loans or investments go sour.

The bank also said in its annual report that nations should speed up complying with the rules if banks are profitable and credit flows won't be restricted.

On Saturday, one of the Basel-based institution's committees proposed rules requiring the world's biggest banks to hold an extra 1 percent to 2.5 percent of capital on their balance sheets, depending on their size.

The aim is to discourage banks from becoming so big that their failure would destabilize global financial systems.

The cash buffers that giant global banks would have to hold would be in addition to an existing requirement that all banks hold 7 percent of their assets in reserve.