IMPLEMENTING new international banking regulation could stymie economic growth rates around the world. Dr Warren Jestin, senior vice-president and chief economist at Scotia Economics of Scotiabank in Toronto, Canada, believes that “re-regulation” – stipulating that banks be more capitalised – would lead to stricter lending practices and stave off demand for credit. “Changes in banking regulation means that banks will hold more capital, reduce risk, change lending practices or risk- adjudication practices.
“When banks are required to hold more capital, it is not simply a matter of banks going to the market and raising more capital. In some instances banks may say the cost of capital is too high. Also, based on the returns to that capital, they might decide to shrink lending as the alternative to raising more capital.” Jestin, who recently visited Barbados for meetings with some of Scotiabank’s clients, noted that sub-prime mortgages – which represented 24 per cent of all United States new mortgages over the last three to four years before the 2008 financial crisis – would be particularly affected.
He said financial institutions were enablers of growth and when the sub-prime crisis hit the US, banks became disablers of growth. “Now we are back in an enabling growth period, but changing the regulatory environment will be one other thing that dampens things down. Some of that [provision of credit] may be taken up by the shadow banking sector [institutions such as investment banks and hedge funds]. “At the end of the day, the shift in rules that will govern financial institutions going forward is biased towards slowing growth,” Jestin said. (SR)
