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(Larry Downing)
(Larry Downing)

Global bank reform: It'll cost $221-billion Add to ...

Top banks will need an extra $221-billion (U.S.) of capital and see annual profits slump by $110-billion if all proposed regulations to reform the industry are brought in, leading analysts said on Wednesday.

If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 per cent from 13.3 per cent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned.

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"The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy," Nick O'Donohue, head of research at JPMorgan, said in a research note.

The capital needs of banks would be $221-billion higher in the extreme event that all the reforms were brought in.

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British banks alone would need $91-billion, other European banks would need $86-billion and U.S. banks would need $44-billion, JPMorgan estimated.

The most impacted banks could be Britain's partly-nationalized Royal Bank of Scotland and Lloyds, it said.

Pretax profits among the global banks would be cut by $110-billion. Net income in 2011 would more than halve to $74-billion, JPMorgan forecast.

G20 countries had been co-ordinating efforts to create a strong banking landscape, but the United States and other countries have also put forward separate proposals.

Among the plans are increasing capital and liquidity requirements; the possible separation of retail and investment banking activities; caps on size and potential levies on systemically important institutions.

Banks could end up passing the cost on to customers through higher prices.

"In order to return to similar levels of profitability as per current forecasts, we estimate that pricing on all products (retail banking, commercial banking and investment banking) would have to go up by 33 per cent," Mr. O'Donohoe said.

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