Following a flurry of regulatory activity at the end of 2009, the broad outline of global financial regulation after the crisis is falling into place, with most of the reforms due to be in force by the end of 2011.
Banks are still struggling to work out how all the parts will fit together and, most importantly, how much it will all cost. Until regulators calibrate their frameworks and settle on the precise quanta of capital charges, liquidity buffers and so on, it will be impossible to come up with a definitive answer, but the industry is starting to get a sense of the shape and scale of the problem.
Research published this week by Barclays Capital sheds considerable light on the question, at least for banks that are likely to be deemed too big to fail.
The results, while preliminary, show tremendous variability among banks, and also widely disparate impacts of particular regulations on the same institution. For instance, the well capitalised HSBC would need to raise just 4% of its current market capitalisation by 2011 if a 200bp too-big-to-fail charge were applied. Allied Irish Banks, by contrast, would need to raise more than six times its market cap to meet the same standard. UBS and Credit Suisse, which have already had severe measures forced on them by the Swiss regulator, would not need to raise any more capital at all.
Another aspect of regulatory reform, however, would hit even well capitalised and conservatively funded global banks like HSBC very hard. If the FSA’s proposals to make local subsidiaries self-sufficient were to be adopted globally, it would need to raise as much as $19bn in capital and increase deposits by $193bn.
As the Barclays analysts point out, this calculation points to a reversal of the logic of Basel 2, under which banks gain a benefit for international diversification.
Keeping things simple will also be incentivised by the revisions to Basel 2 imposing higher capital charges on many investment banking activities. Barclays estimates, based on balance sheet figures for the first quarter of 2008, that Société Générale’s returns on equity for investment banking and domestic retail banking would be reversed between Basel 1 and Basel 2.5. Under the old regime, investment banking was nearly six percentage points more profitable than French retail, while the opposite is true under the new regime. Crucially, two whole percentage points of that reduction in investment banking profitability comes during the transition from Basel 2 to 2.5, which leaves retail profitability untouched.
Regulators may have eschewed a return to formal Glass-Steagall style separation of banking activities, but it seems clear that the new regulations will have a similar end result.