More on that doomsday regulation scenario for banks.
JP Morgan has published a whopping 184 pages on the potential impact of proposed regulatory reform on financials — that’s things like the Volcker rule, increased liquidity requirements, the Tobin tax, leverage ratios, living wills, capital reform and accounting changes.
In sum, the JPM analysts reckon that current proposals will see return on equity (RoE) for the world’s investment banks drop to an estimated 5.4 per cent for 2011, from 13.3 per cent. UK banks will be the most affected, they say, followed by those in Europe, and then the States.
You can see a breakdown of the earnings impact of reform proposals, by bank, in this rather nifty chart:
The issue then is the extent to which banks can pass on the `cost’ of the regulatory hit to their customers. By JPM’s estimates pricing on financial products would have to go up by 33 per cent for bank sector RoE to get back to 13.3 per cent. On a bank-by-bank basis, at Credit Suisse, RBS and Deutsche Bank product pricing would need to go up by 50 to 60 per cent.
And going straight to bankers’ hearts — JPM also contends that the higher cost of regulation can’t just be offset with lower compensation for bankers, as some might wish. With the ratio of compensation to revenue at 35 per cent (versus a historical average of 45 to 50 per cent), product pricing would still need to increase by 26 per cent.
Thus the customer — not the banks or bankers — could well end up bearing most of the cost of financial reform.