FRANKFURT (MNI) – An assessment by central banks and supervisory
authorities of the impact of regulatory reforms on the real economy are
likely to paint a far more positive picture than suggested by the
banking industry, European Central Bank Executive Board member Lorenzo
Bini-Smaghi said Wednesday.

“Given the scope of the reform, I wish to emphasise that regulators
and central bankers are fully aware of the importance of a thorough
assessment of its overall impact, including the interaction between
different rules and the potential consequences for financial
intermediation and for the real economy,” Bini-Smaghi said in a speech
text prepared for delivery at the Squam Lake Conference in New York
City.

He said that the Basel Committee and the Financial Stability Board
are therefore carrying out extensive tests to assess the overall impact,
and that first findings are to be released in July.

“The first results of these exercises are expected to be available
next month. The BCBS will issue by the end of this year a fully
calibrated, comprehensive set of measures based on the outcome of this
work,” Bini-Smaghi noted.

While it is “too early to draw solid conclusions,” Bini-Smaghi said
that “it has recently been suggested that the impact of the Basel
Committee reforms on growth may be limited, especially when compared
with figures circulated by the industry, which tend to be based on
somewhat extreme assumptions.”

The Institute of International Finance (IIF), a bank lobby group
representing more than 400 firms, warned last week that proposed
regulatory changes would severely hit growth particularly in the
Eurozone. The IIF projected GDP in the Eurozone to be 4.3% lower by 2015
if reforms are implemented.

“Nevertheless, macroeconomic conditions and the health of banks’
balance sheets would still be relevant factors when deciding on proper
implementation arrangements,” Bini-Smaghi conceded.

“With regard to the latter, I would also like to comment on the
crucial role of international coordination and cooperation for the
success of the regulatory efforts to shape a better prudential
framework,” he said. This is essential to ensure a level playing field
and prevent international regulatory arbitrage, Bini-Smaghi added.

“While the EU legislation already reflected the amendments referred
to in the Basel accord, the US committed to do so by 2011. I am
confident that the US authorities will live up to their commitment and
will take the necessary steps to further enrich their national framework
so as to take into account the latest proposals formulated by the Basel
Committee,” he said.

Bini-Smaghi also said that the “sweeping reform of the rules, in
particular of capital adequacy and liquidity requirements” is not enough
to ensure a sounder system in the future but that supervision equally
must be strengthened.

“Too much emphasis is placed on monitoring a mostly formal
compliance with the rules. In other words, the light-touch approach to
supervision is ineffective because it failed to recognize the powerful
incentives of financial institutions to game what on the surface
appeared to be well-intentioned and granular requirements,” Bini-Smaghi
said.

“Looking ahead, supervision will have to move towards taking a
proactive and forward-looking approach. Likewise, the regulatory net
needs to be cast wide enough to encompass all financial institutions and
activities capable of generating systemic effects,” he asserted.

–Frankfurt bureau, +49-69 720 142; jtreeck@marketnews.com

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