January 12, 2011

New Banking Regulations to Cut Profitability: KPMG

Liquidity is biggest challenge, threatens “systemic reduction”

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A report by KPMG finds that the regulatory pressures on banks worldwide will have an impact on profitability and liquidity that will amount to a “systemic reduction,” if business models do not change.

Scott Marcello, national leader of KPMG LLP's U.S. financial services practice, said Wednesday in a statement, “Our report indicates that while the regulatory changes may make banking safer—they could also limit the diversity and innovation which has underpinned economic expansion.”

The report, titled “Evolving Bank Regulation,” focuses on the development of the regulatory paradigm and its impact on stakeholder expectations, systemic risk, and how banks govern their businesses, according to the company.

Tony Anzevino, national leader of KPMG LLP's banking and finance practice, said in a statement, “Leading global banks are facing the challenge of implementing critical changes in capital and liquidity well ahead of stated timetables, in order to meet or exceed market expectations.”

He added, “But many other banks are not yet in a position to respond to the full implications of these changes and, as a result, the journey to full compliance is likely to be long and intensive. Additionally, if changes are not made to banks' business models, signs are that regulatory developments around liquidity specifically may introduce an era of lower profitability.”

The report says that the large size of new liquidity buffers could sharply increase the cost of liquidity and compel liquid funds to be held in low-risk

vehicles that incidentally also provide low returns. Banks will need to adjust their strategies and models to accommodate new regulations and demands.

In the index below, the report identifies the types and relative pressures of new regulation on different regions within the global banking sphere. U.S. and European banks are found to be most under pressure, while the Asia/Pacific region is in better shape to face coming change, thanks in part to the changes already made in the wake of its own banking crisis in 1999.

KPMG’s Regulatory Pressure Index

Regulatory Reform

Europe

Americas

Asia/Pacific

Total

Liquidity

5

4

4

13 

Capital 

4

4

10 

Systemic Risk

5

11

Supervision 

5

11

Governance 

4

12

Remuneration

3

1

8

Traded Markets

4

1

9

Customer Treatment

4

1

8

Accounting & Disclosure

3

3

9

Total

36

36

19

 

This high-impact/low-impact analysis is based on KPMG firms’ discussions with market contacts.

Key: 5 = high impact, 1= low impact

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