Europe News

Investment Banks Try to Cushion Rule Changes

By Patrick Jenkins, Financial Times

Investment bankers have begun to develop ways in which banks might be able to circumvent the most punitive of the new capital rules being drawn up by international regulators.

According to investment bankers and senior bank executives, new products are being developed that would allow banks to mitigate the shrinking of their capital bases under the new rules by using a new generation of financing structures.

The more entrepreneurial investment banks – traditionally the likes of Goldman Sachs, JPMorgan and Deutsche Bank in this kind of area – have spent recent weeks touting new product ideas to banks that will be hit by the new rules.

The initiatives are focused in particular on ways in which deferred tax assets – to be outlawed as capital under current Basel thinking – can be turned into cash or an equivalent that would be valid for capital purposes.

Bankers say the assets could be sold at a discount of 20-30 percent, either via actual sales or using derivative instruments, to non-bank buyers.

Pension liabilities could be re-engineered in similar ways. Many bankers will support the initiatives as good creative thinking.

But critics will see them as the latest evidence that banks have not learned their lesson from the crisis and will always focus on arbitraging the system for a profit, however tough the rules.

The Basel Committee on Banking Supervision has set a Friday deadline for responses to its consultation exercise on tough new rules on bank capital and funding, which it proposed at the end of last year.

The proposals, drafted in the wake of the financial crisis, aim to ensure that the shortage of liquid funds and the weak capital cushions that allowed the crisis to spread so fast, cannot recur.

But the proposals have been tougher than many expected, prompting controversy and resistance in many quarters. Few banks dispute the need for strengthened finances across the industry.

But many are concerned that the proposals – which would outlaw a whole range of capital quirks – would cut banks’ profits to unsustainable levels, especially if they are brought in by 2012, as originally envisaged.

In a bid to win political backing, the banks have focused their opposition on the damage that could be done to the global economy if they are so hamstrung that they cannot lend effectively to businesses.

Stephen Green, chairman of HSBC , told the Financial Times that there was a consensus developing among banks and regulators that the new rules should be “gradually phased in”.

Although banks are hopeful that the Basel committee will relent on some of the toughest crackdowns, there is a recognition that they could benefit from regulatory arbitrage.