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Emerging Markets

Bankers caution on capital rules

One of the world’s largest cross-border banks has warned financial regulators not to rush into setting new rules on capital requirements while the economic recovery is still in jeopardy.

Mike Rees, CEO of wholesale banking at Standard Chartered, said that leaders of the G20 group of rich countries had adopted a “schizophrenic” attitude towards big banks.

“There is a schizophrenia between getting the economy going and public perception [of the banks] and that is causing problems,” he told Emerging Markets in an interview on the fringes of the IMF Annual Meetings.

“Who knows where the debate will go. A recession is the wrong time to impose big capital requirements. If you are going to lift them, you should it in the good times.”

Although the G20 has named 2012 as the deadline for implementing the improvements in the quantity and quality of bank capital and reducing leverage, Rees said banks would have to start working on implementation now.

“The markets will be looking at the banks today,” he said. “2012 means we have to do it today, because the refinancing cannot take forever. The reality is that we have got to get it right today.”

Changes to the rules on leverage would have a major impact on the amount that banks could lend out, Rees said. “You have to wonder if governments would be better supporting banks with lower capital adequacy and stimulating lending, rather than [debating] the appropriate level of lending.”

He also cast doubt on the relevance of “living wills” – documents that cross-border banks may have to draw up to help the authorities in the case of a Lehman Brothers-scale failure.

Rees said effort would be better spent on ensuring that global supervision was improved. “It has got confused about what it is trying to achieve,” he said, describing living wills as simply overseeing the “death rites” of a bank.

“What needs to come out is how regulators co-ordinate ... on identifying early signs of the problems and co-ordinate so that it gets there [collapse]. Coordinating the regulators is more significant.”

Standard Chartered, which generates the vast majority of its revenues in Asia, Africa and the Middle East, has put in place many of the recommendations for financial regulation, after the Asian crisis of 1997.

Standard Chartered is one of the relative winners from the financial crisis. Over the first six months of 2009, income was up 14% year-on-year and pre-tax operating profits rose 10%. But Rees warned the economic recovery was still fragile. “We are cautious about the world at the moment.”

He played down hopes of a sustainable recovery in trade finance. “The economy is becoming increasingly globalized but the finance sector is becoming increasingly nationalised,” he said.

Rees said governments had been keen for domestic banks to support the local economy. “One of the problems is that there has been a real constraint on trade finance,” he said. “International companies worry about how they can get finance.”

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