Financial reform will hold back economic growth until 2016

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Lianna Brinded
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Institute of International Finance directors, including Deutsche Bank’s Josef Ackermann, say new regulations will be a drag on global economic growth for five years as bank lending rates rise

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Basel III

Josef Ackermann

Charles Dallara

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Global financial regulatory reforms will prevent economic recovery until at least 2016 as bank lending rates rise and cost jobs, while long-term net debt funding for banks will increase to $1.5 trillion by 2020, says The Institute of International Finance (IIF) in a new report.

The IIF study, titled The cumulative impact on the global economy of changes in the financial regulatory framework, estimates that banks in the leading industrial economies will require additional capital of $1.3 trillion by 2015. This could push bank lending rates up by over 3.5 percentage points on average for the next five years.

Josef Ackermann
“This study needs to be seen in the context of the IIF’s strong support of key financial reform measures, such as the new Basel III capital requirements and their implementation timetable,” says Josef Ackermann, chairman of the IIF board of directors and chief executive at Deutsche Bank. “In addition, the IIF has encouraged improvements in important industry practices, such as risk management, compensation and governance. Against this background and in light of the IIF’s projections, it is critically important that the macroeconomic impact of additional regulatory measures under discussion, as well as the impact of approaches to implement measures already taken, be a consideration for governments and regulatory authorities.”

The IIF study estimates all banks’ long-term net debt funding requirements will be $816 billion by 2016, rising to $1.5 trillion by 2020, of which about $670 billion is for banks in the eurozone.

The study also reveals that the lending rate increase will lead to about 7.5 million fewer jobs being created. It says that the negative economic effects would likely fade after 2016, but the maximum drag of reform on the global economy would be at a time when it is apparently least well placed to handle it.

“The necessity of financial sector reform is unquestionable,” says IIF managing director Charles Dallara. “However, it is essential to find the right balance in this process, especially at a time of pronounced economic weakness. 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. Certainly, deleveraging was essential following the bubble period leading up to this crisis, but a key question that looms now is whether further deleveraging is productive at this time.”

The study estimates real GDP growth in 2015 at –2.7% in the US, –3% in the eurozone, Japan will slip –4%, while UK will be down –5.5% and Switzerland –3.7%.