G-20 Bank Push Risks Profits

Global leaders meet this week seeking to deliver the broadest financial regulation overhaul since the 1930s, potentially threatening profits and stock prices of banks such as Goldman Sachs and Barclays.

Global leaders convene in Pittsburgh on Sept. 24-25 to cement a plan to force banks to curb leverage, hold more equity capital and keep a greater pool of assets that can be easily traded. Restraining bankers’ pay and narrowing imbalances in trade and savings will also feature on the agenda as officials try to hammer out an accord to prevent a repeat of the worst crisis since the Great Depression and ensure a sustained recovery.

By limiting the scope of banks to invest and trade, governments may check this year’s 22 percent gain in the Standard & Poor’s 500 Financial Index. That may be a price they’re willing to pay to prevent a repeat of the risk-taking that sparked the collapse of Lehman Brothers Holdings Inc. a year ago, a worldwide recession and taxpayer-funded bank rescues.

Regulation will make banks less profitable by increasing the cost of doing business. Under consideration: forcing banks to augment their capital buffers to better account for risk, retain more earnings and satisfy a leverage ratio, which measures equity as a proportion of total holdings.

Obama saw there has been a culture that rewards short-term thinking, that used leverage to take exorbitant risks that were unsustainable for the system as a whole and that’s the culture he thought that they’ve got to reverse.

The amendments to capital requirements will also clearly affect the activities of banks in their trading books and securitizations. The new rules will probably also take years to go into effect, with U.S. Treasury Secretary Timothy Geithner proposing that new capital requirements be in place by the end of 2012.