Liquidity Mandate in Rising Regulation May Lead to Systemic Reduction in Bank Profitability, Innovation: KPMG Report

NEW YORK, Jan. 12, 2011 /PRNewswire/ -- A new report from KPMG International finds that new regulations related to bank capital and liquidity requirements should strengthen the resilience of banks, but enhanced liquidity requirements specifically may cause a systemic reduction in banking profits, resulting in a fundamental reshaping of the sector.  

"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," said Scott Marcello, national leader of KPMG LLP's (U.S.) Financial Services practice.  

The KPMG 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.

"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," said Tony Anzevino, national leader of KPMG LLP's Banking and Finance practice.  "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 KPMG report highlights that new liquidity buffers – potentially three times their current size – will increase the costs of liquidity sharply and may permanently depress margins.  Liquid funds may have to be held in low-risk, low-return assets such as government bonds, yielding small returns and further reducing profitability.  The cost of attracting long-dated retail deposits will be a key business challenge over the next few years, according to the KPMG report.

"In addition to focusing on profitable growth, the list of challenges as a result of regulatory reform expands with ever closer supervision looming, additional regulatory requirements for banks deemed systemically important, game-changing reforms to traded markets rules, and fast-track changes to accounting and disclosure requirements," said Linda Gallagher, national leader of KPMG LLP's Financial Services Regulatory practice.  "Banks that plan and prepare early for these new regulations, embedding new requirements in how they govern and direct the business, while also refining and changing their business models will be the best positioned for success."  

U.S. and European Banks to Face Most Intense Regulatory Pressure

KPMG's report contains a "Regulatory Pressure Index," which seeks to capture the challenges that banks in different regions of the world face over the next two years.  The Index shows that, overall, European and U.S. banks face the greatest challenges, while banks in the Asia Pacific face considerably less pressure.  Commentators in the Asia Pacific attribute the relatively lower pressure in that region to the changes that have already been made to the sector in the wake of the Asian banking crisis of 1999.  

In terms of individual areas representing the greatest challenge for banks globally, liquidity issues emerged as the top area, followed by governance, and then supervision and systemic risk.

About KPMG LLP

KPMG LLP, the audit, tax and advisory firm (www.us.kpmg.com), is the U.S. member firm of KPMG International Cooperative ("KPMG International").  KPMG International's member firms have 140,000 professionals, including more than 7,900 partners, in 146 countries.

SOURCE KPMG LLP