RBA's Stevens Warns Regulators Over Bank Reforms

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Regulators should take care not to endanger global growth by implementing bank reforms hastily, Reserve Bank of Australia Governor Glenn Stevens has warned. He also said the outlook for global growth had become more clouded due to uncertainties in Europe and Asia putting the brakes on growth.

He said a new set of regulatory reforms would drive up the spreads between the banks' borrowing and lending rates, raising the costs for customers around the world and hurting economic growth. "That is a reason to proceed carefully, and to allow time for the new rules to be phased in," Stevens said at a business luncheon event in Sydney.

"Clearly, we wish the new rules to be constraining risk taking and leverage as the next boom approaches its peak, but that will probably be some years away, so we have time to implement strong standards and allow an appropriate period of transition," he said. Stevens added that the reforms would have to "carefully calibrated" so that they don't curb growth.

The Basel Committee has already proposed a mandatory capital buffer for banks so that they can withstand future shocks in the financial sector. The committee hasn't yet set out a timeline for implementation of the proposals.

"In a nutshell, what regulators are pushing toward is a global banking system characterized by more capital and lower leverage, bigger holdings of liquid assets and undertaking less maturity transformation," said Stevens. "It is hoped that this system will display greater resilience to adverse developments than the one that grew up during the 1990s and 2000s."

Another issue that regulators will have to deal with is that very restrictive regulation on one part of the financial sector could easily result in some activities migrating to the lesser regulated parts of the system. "Financiers will be very inventive in working out how to do this," he said. "If the general market conditions are conducive to risk taking and rising leverage, people will ultimately find a way to do it."

Stevens said the outlook for global growth in 2011 had become clouded, due to uncertainties in Europe, and Asia looking to rein in runaway growth. Still he said the global economy could have risen by upto 5% over the year to June 2010.

The RBA head stated that the Australian economy had been relatively shielded from the effects of the global downturn. "In Australia we have been spared the worst impacts of serious recession in terms of lost jobs, much as we will be spared the prospect of higher taxes that face so many in the developed world," he said. "These are factors that support our native optimism, at least about economic conditions."

Stevens said a rise in the debt levels of major countries is inevitable following a global downturn like the one just witnessed. The International Monetary Fund has forecast the ratio of public debt to gross domestic product in the G20 group of nations to rise by almost 40 percentage points from its 2008 level by 2015.

"This was largely unavoidable," he said. "Had the debt not been taken on it could well be that the economic outcomes would have been much worse."

The debt load of advanced economies will continue to rise for several more years, raising the servicing burden, he said. "This has placed some governments in a very difficult bind, since the heightened focus on sustainability has increased the pressure for fiscal consolidation at a time when aggregate demand remains weak," said Stevens. "The 'least damage path' through the various competing concerns has become harder to tread." (Provided by RTTNews)