Bank of Canada Governor Mark Carney says commercial banks should explore ways to shield borrowers from bearing the full brunt of new higher capital standards – among them, by cutting their own personnel expenses.
In a speech at the German central bank Tuesday, Mr. Carney pointed out that avoiding the massive costs of another crisis far outweighs any short-term pain felt by banks and their customers.
The economic case is “compelling” for implementing the so-called Basel III deal struck over the weekend by global regulators.
“Contrary to what some in the industry would have you believe, there is some price worth paying to reduce’ economic consequences in the future, he said at the Deutsche Bundesbank in Berlin. “
Based on a new estimate by the bank of Canada, Mr. Carney said the net benefit of creating a less risky global financial system is worth about 30 per cent of gross domestic product, or $13.3-trillion, to the Group of 20 countries. For Canada, the benefits of tougher capital and liquidity standards are worth roughly 13 per cent of GDP, or $200-billion, he said. The gains for Canada are less dramatic because the financial crisis here was much less severe.
The estimates assume banks put in place strategies to cope with the proposed two-percentage-point increase in capital standards, agreed to over the weekend by global regulators.
Mr. Carney said banks have many ways to reach that mark. They can raise capital in financial markets, hang on to more of their profits or jack up fees and interest rate spreads.
But he suggested that if banks slashed compensation by 10 per cent, they could fully offset the cost of the new capital standards. And that would lessen the impact on the economy, by keeping borrowing costs lower.
Multimillion-dollar pay packages and bloated bonuses for bankers have become a sore point for many investors and business who suffered in the crisis.
“The point is not to pile up so much capital in our institutions that they are never heard from again, either as a source of instability or of growth,” he said. “The challenge is to get the balance between resiliency and efficiency right.”
And he said the weekend agreement “strikes exactly the right balance.”
Many bankers have argued that the reforms are too strict, imposing punishing costs on the economy through sharply higher interest rates and fees for borrowers.
Mr. Carney rejected that notion. In his speech, he said the recent financial crisis took a huge bite out of the global economy, and countries have to do everything they can to reduce the likelihood that it happens again.
The Bank of Canada estimates the recent crisis will cause a cumulative hit to GDP of 9 per cent in Canada between 2009 and 2012, and 30 per cent over the longer term. For Europe, the cost is even greater: 16 per cent between 2009 and 2012, and 40 per cent over all.
“Given the scale of potential losses, there are clearly large benefits to reducing the frequency of crises,” Mr. Carney said.
