Friday, December 7, 2012

Regulations making banks 'uninvestable'

The Telegraph reports that the Association of British Insurers thinks banks are becoming 'uninvestable' as a result of the new complex rules/regulations introduced to make banks safe since the beginning of the financial crisis.

It is not surprising that there is an unintended consequence of these new complex rules/regulations.  After all, these new complex rules/regulations are designed to be combined with greater regulatory oversight as a substitute for transparency and market discipline.

What is surprising is that the unintended consequence turns out to be another stake in the heart of the financial system.

Think about it.  If banks are 'uninvestable', it means that banks are not subjected to any market discipline.

The only restraints on their behavior is from the regulators.  Regulators who failed to restrained the banks' behavior in the run up to the financial crisis.
The Government’s mission to create a safe financial system is “unrealistic” and is making the banks “uninvestable”, a group of Britain’s biggest investors has warned. 
The shareholders have used a hard-hitting report by the Association of British Insurers to issue a stark warning that regulatory demands on banks are crushing lenders’ return on equity and the case for investors to buy their shares. The cost of higher capital requirements and structural changes like “ring-fencing” is such that banks will have to double their profits just to meet the new cost of capital, claims the report, which is issued today. It adds that without leverage, the profits will have to be driven increasingly from the costs of loans, cutting jobs, or axing bank branches. 
Investors hope the report will serve as a warning to politicians and regulators who want the major banks to raise billions of pounds of capital to shore up their balance sheets. 
“It’s in everybody’s interest that banks raise debt and equity from the public markets and are not reliant on taxpayers for funding,” said Robert Hingley, director of investment affairs at the ABI. “We want safe banks but they must also be allowed to be profitable.” He added: “The greater focus on safety is having adverse consequences this side of the table.” 
The report says: “Investors want a secure and properly capitalised banking system and are supportive of regulatory reform, although banks’ crucial social role in liquidity and maturity transformation means a truly “safe” system is unrealistic.” 
The report adds that ABI members, who control £1.5 trillion of assets and are among the banks’ biggest shareholders, “expressed caution about imposing ever increasing layers of regulation formulaically, which are likely to affect adversely pricing and profitability.” 
The report explains: “Basic financial economics dictates that, if return on equity remains structurally below the cost of equity, the equity of banks will remain essentially uninvestable.” 
By way of solutions, the report calls for reassurance from regulators that banks will be able to “achieve sustainable returns above the cost of equity and re-establish dividend payments across the whole sector.” It demands an end to the “apparent indecision around capital levels, capital structure and structural change e.g. ring-fencing.”.... 
Anne Richards, chief investment officer of Aberdeen Asset Management: “We are asset allocators and have to make the best choice for investors. With RBS and Lloyds, the reality is we can find simpler and more attractive investments that don’t have the risks ..."

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